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THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 
LOS  ANGELES 


TV 


SOUTHERN  BRANCH, 

UNIVERSITY  OF  CALIFORNIA, 

LIBRARY, 
LOS  ANGELES,  GAU& 


Library 

Graduate  Sc^ol  of  Business  Administration 

University  0f  California 

Los  Angeles  24.  California 


COST  REPORTS  FOR  EXECUTIVES 


COST  REPORTS 

EXECUTIVES 

AS   A    MEANS   OF  PLANT   CONTROL 


BY 

BENJ.  A.  FRANKLIN 


NEW  YORK 
THE  ENGINEERING  MAGAZINE  CO. 


58589 


Copyright,  1912,  by 
The  Engineering  Magazine  Co. 


iS) 


Bus.  Admin. 
Library 

HF 
C8F8 


INTRODUCTION 


THE  volume  to  which  this  announcement  is  an 
almost  needless  introductory  reassembles  a 
series  of  articles  originally  prepared  by  Mr.  Frank- 
lin for  appearance  in  The  Engineering  Magazine, 
and  published  in  its  issues  from  January  to  August, 
1912. 

In  this  treatment  of  a  subject  upon  which  much 
had  already  been  written,  the  author  approaches 
the  study  of  costs  from  a  distinctively  new  point  of 
\«\   view.    This  is  the  point  of  view  of  the  executive 
and  not  that  of  the  cost  clerk.    It  is  the  interpreta- 
tion of  cost  totals,  and  the  analysis  of  those  totals 
,      into  their  significant  components — not  the  record- 
^*     ing  of  cost  details,  or  the  assembly  of  these  details 
on  prescribed  forms.    The  purpose  is  to  bring  out 
the  invaluable  help  which  cost  accounts  may  ren- 
der  to  the  manager — not  to  show  how  the  daily 
routine  may  be  accomplished  by  the  cost  depart- 
ment and  its  employees. 

The  presentation  therefore  lays  little  stress  upon 
the  headings  and  rulings  of  forms  and  cards  or  the 
details  of  clerical  work.  It  lays  much  stress  upon 
the  substance  of  the  information  which  the  forms 
should  present,  and  the  interpretation  of  that  sub- 
stance so  as  to  direct  manufacturing  and  commer- 
cial effort  always  toward  more  profitable  result. 

5 


6  INTRODUCTION 

The  discussion  is  thus  directed,  first,  toward  the 
principles  and  elements  which  must  be  recognized 
to  make  cost  reports  afford  a  true  and  instant  rev- 
elation of  actual  conditions.  It  proceeds,  next,  to 
the  methods  by  which  these  principles  may  be  ap- 
plied and  the  elements  obtained  and  assembled. 
Progressing  thus  from  the  greater  to  the  less,  it 
examines  details  of  cost  collecting  only  so  far  as 
they  are  important  and  interesting  to  the  higher 
official. 

Nevertheless,  while  the  first  purpose  is  to  empha- 
size the  value  of  correct  cost  methods  to  the  man- 
ager, that  very  emphasis  directs  the  vision  of  the 
auditor  and  the  cost  accountant  to  the  significance 
which  cost  figures  may  be  made  to  convey;  and 
thus  the  work  becomes  of  more  value  to  the  audit- 
ing and  cost-accounting  departments  than  many 
treatments  of  the  subject  which  do  not  look  beyond 
the  desk  of  the  clerk,  and  therefore  fail  to  lift  his 
vision  to  the  paths  leading  upward  from  clerical 
routine  to  executive  authority  and  industrial  man- 
agement. 

Charles  Buxton  Going. 


PREFACE 

THE  object  of  this  book  is  to  discuss  with  the 
executive  of  a  manufacturing  plant,  after  a 
considerable  experience,  not  how  to  build  a  cost 
system,  but  what  he  should  have  when  his  cost  sys- 
tem is  built;  to  illustrate  it  by  actual  forms  filled 
with  figures  to  make  their  use  clear ;  and  to  discuss 
with  him  the  values,  the  uses,  and  the  essential 
necessities  of  a  right  and  practical  cost  system,  with 
the  idea  in  mind  constantly  of  showing  how, 
through  casting  it  into  the  forms  shown,  the  vital 
operations  of  his  material,  labor,  and  expense,  and 
their  relations  one  to  the  other  are  made  plain,  and 
the  whole  manufacturing  situation  so  illustrated  as 
to  offer  him  a  grip  upon  it. 

The  writer  believes  that  cost  is  the  basic,  the 
fundamental  factory  improvement,  through  which 
the  able  executive  can  exercise  control,  which 
further  suggests,  urges,  and  brings  about  other  im- 
provements when  it  is  intelligently  operated.  In- 
telligent operation  involves  understanding  and 
practice  of  the  philosophy  of  costs  which  is  out- 
lined in  this  volume. 

No  attempt  is  made  to  cover  every  ramification, 
but  the  main  points  are  illustrated  and  covered,  and 
an  understanding  of  these  will  necessarily  lead  into 
all  necessary  details. 

7 


8  PREFACE 

The  forms  are  not  intended  to  be  applicable  to 
any  particular  business,  and  must  essentially  be 
cast  up  in  varying  ways  according  to  conditions. 
They  illustrate  merely  the  principles. 

Too  little  attention,  the  writer  believes,  has  been 
given  by  executives  to  a  right  understanding  of  the 
methods  and  possibilities  of  cost  systems  in  manu- 
facturing plants,  yet  it  is  believed  that  the  study 
will  highly  reward  any  practical  man,  and  it  is 
hoped  that  this  attempt  at  a  practical  treatment 
of  the  subject  will  meet  with  enough  attention  to 
hasten  the  inevitable  time  when  cost-system  knowl- 
edge will  be  an  essential  requisite  of  the  able 
manager. 

Benj.  A.  Franklin. 

December,  1912. 


CONTENTS 

PAGE 

Chapter  I.    The  Philosophy  of  Costs 

Profit  an  Essential  Aim  of  Manufacture — 
Knowledge  of  Profit  Depends  upon  Correct  Costs 
— Correct  Cost  Based  on  Mathematics — Value  of 
Accurate  Costs  Often  Overlooked — Value  of  Un- 
derstanding the  Philosophy  of  Costs — Small  Ex- 
pense of  an  Effective  Cost  System — The  Main 
Divisions  of  Costs — Variation  of  Costs  at  Differ- 
ent Times — Reason  for  Cost  Variation — The  Ex- 
pense Element — Use  of  Imagination  in  Interpret- 
ing Costs — How  It  Enables  the  Executive  to 
Visualize  Conditions  in  His  Plant — Standards  as  a 
Basis  for  Cost  Interpretation — Standards  when 
Determined  Reveal  All  Departures  from  Normal 
— Value  of  Promptness  in  Obtaining  Cost  Figures 
— Seven  Essential  Cost  Facts,  and  Periods  at 
Which  They  Should  Be  Determined — Proper  Use 
of  the  Cost  System — Characteristics  of  the  Ideal 
Cost  System  .  .         .         .         .         .         .15 

Chapter  II.     The  Place  of  the  Trial  Balance  in  the 

Cost  System 

Relation  of  the  Trial  Balance  to  Costs  Usually 
Very  Distant — Costs  Should  Be  a  Part  of  the 
Bookkeeping  System — How  the  Connection  May 
Be  Established — Form  1,  Trial  Balance,  Giving 
Monthly  Showing  of  Manufacturing  Costs  and 
Conditions — Use  of  the  Form  Explained  and  Its 
Significance  Discussed — Form  2,  Sub-Statement, 
Affording  Monthly  Comparisons — Use  of  Form  2 
Explained — Possibility  of  Monthly  Production  of 
Trial  Balance  and  Sub-Statement         .         .         .41 


10  CONTENTS 

PAOI 

Chapter  III.     The  Cost  of  the  Salable  Article 

Accurate  Cost  of  the  Salable  Article  One  of  the 
First  Results  Expected  of  a  Cost  System — This 
Cost  Must  Be  Proven  and  Immediately  Compar- 
able with  Other  Costs — Many  Business  Failures 
Result  from  Unproven  Cost  Figures — Many  Cost 
Systems  Faulty  because  Undertaken  from  the 
Wrong  Point  of  View — How  Accurate  Costs 
Should  be  Found — Form  3,  Executive's  Order 
Cost  Record — Its  Items  Explained — Form  4,  De- 
tails of  Order  Cost — Form  5,  Costs  of  a  Single 
Part — Relations  between  Forms  3,  4t,  and  5 
Pointed  Out — Form  6,  Cost  Details  in  Manufac- 
ture of  Small  Staple  Goods — How  These  Forms 
May  Be  Made  to  Visualize  Plant  Conditions — 
Proper  Periodicity  in  Presenting  Order  Costs — 
Values  to  Be  Obtained  from  Order  Costs — Pos- 
sible Extension  of  the  Use  of  Order  Costs  .         .       53 

Chapter  IV.     The  Economic  Consideration  of  Material 
by  Costs 

Definition  of  Material — Two  Classes  of  Ma- 
terial— Difficulties  in  Getting  Accurate  Records  of 
Direct  Material — The  Application  of  Material 
in  Article  Costs — Wastes  of  Material — Their 
Enormous  Extent — Four  Principal  Forms  of  Ma- 
terial Waste — Form  7,  Which  Detects  Waste  in 
Progress  of  Manufacture — Form  8,  Showing 
Waste  in  Mass  Production — Form  9,  Showing 
Waste  of  Spoiled  Work — The  Importance  of  the 
Study  of  Waste — The  Purchasing  Department 
and  Its  Relations  to  Waste — Form  10,  Material 
Journal — How  It  Connects  Material  Reports  with 
Bookkeeping  Accounts — The  Use  of  the  Form 
Discussed — Absolute  Accuracy  of  Material  Costs 
Obtainable — The  Economies  to  Which  the  Cost 
Consideration  of  Material  Leads  ....       67 

Chapter  V.     Labor  from  the  Cost  Viewpoint 

Labor  the  Central  Element  in  the  Cost  Trio — 
Its  Chief  Interest  to  the  Executive — Its  Two  Di- 


CONTENTS  11 

PAGE 

visions  from  the  Cost  Viewpoint — Difficulties  in 
Apportioning  Direct  Labor  to  the  Cost  of  Produc- 
tion— The  Best  Method  of  Getting  Labor  Costs — 
Form  11,  an  Improved  Payroll  Method — Its  Ad- 
vantages to  the  Cost  Clerk  and  Bookkeeper — Form 
12,  Details  of  Operation  Times  and  Costs — Values 
Obtainable  from  the  Use  of  Form  12 — Compari- 
sons Necessary  to  Its  Usefulness — The  Moral  Ef- 
fect of  Labor-Cost  Records — Why  Labor  Records 
Should  Come  under  the  Eyes  of  the  Executive      .       87 

Chapter  VI.    The  Vexing  Question  of  Expense 

Two  Main  Points  in  Considering  Expense  as  a 
Cost  Item — The  Many  Theories  of  Expense  Dis- 
tribution— No  Theoretically  Accurate  Method  Ex- 
ists— How  to  Reach  a  Practical  Theory  of  Cost 
Distribution — The  Two  Elements  to  Be  Taken 
into  Consideration — Various  Methods  by  Which 
Expense  Varies — Applying  Expense  by  Two 
Measures  of  Variation — A  Working  Solution — 
Expense  as  a  Factory  Disease — The  Executive's 
Purpose  Is  to  Keep  the  Factory  Healthy — Ex- 
penses May  Be  Displayed  So  as  to  Control  the 
Running  Situation — The  Expense  Problems  of  Ir- 
regular Volume  of  Production — Treatment  of  Un- 
profitable Lines  of  Production — Recapitulation  of 
the  Elements  of  Practical  Expense-Distribution — 
Arrangement  of  Expense  According  to  Like 
Groups — Form  13,  Department  Apportionment 
of  Depreciation,  Taxes,  and  Insurance — Form  14, 
Details  and  Totals  of  Power  Cost — Form  15,  De- 
tails and  Apportionment  of  Repair  Cost — Form 
16,  General  Expense — Form  17,  Department  Ex- 
pense— Form  18,  Selling  Expense — Form  19,  Ex- 
pense Analysis — Cooperation  in  Studying  Expense 
Analysis  and  Securing  Improvement     ...       99 

Chapter  VII.     Statistics  as  an  Aid 

Expense  Figures  alone  an  Insufficient  Guide  to 
the  Executive — The  Cost  System  Must  Be  But- 
tressed with  Statistics — Statistics  Should  Be  Sup- 


12  CONTENTS 

PAGE 

plied  by  the  Cost  Department — Common-Sense 
the  Best  Guide  in  Their  Preparation — Statistics 
of  the  Selling  Situation  First  in  Importance — 
What  Statistics  Should  Be  Shown — Form  21, 
Volume  of  Sales — Form  22,  Comparisons  of  Sales 
by  Periods — Form  23,  Distribution  of  Sales  by 
Locality — Form  24,  Analysis  of  Sales  by  Custom- 
ers— Form  25,  Salesmen's  Results — Statistics  of 
Advertising  Results — Uses  of  Statistics  as  a  Guide 
to  Production — Statistical  Showing  Should  Be  Il- 
lustrated— Graphic  Methods  of  Showing  Statis- 
tics— Form  26,  Weekly  Cost  and  History — How 
It  Shows  the  Entire  Progress  of  the  Depart- 
ment— Duty  of  the  Executive  to  Study  and  Inter- 
pret Statistics       .         .         .         .         .         .         .123 

Chapter  VIII.  Cost-System — The  Basic  Improvement 
Universal  and  Valuable  Employment  of  Cost 
Figures  in  the  Future  Assured — Analyzed  Costs 
Will  Be  Essential  to  Scientific  Adjustment  of 
Tariff" — Cost  Figures  Indispensable  to  any  Gov- 
ernment Regulation — Possibilities  of  a  Govern- 
ment Bureau  of  Costs — Value  of  a  Right  and 
Practical  Cost  System  in  an  Individual  Plant — 
What  a  Right  and  Practical  Cost  System  Should 
Be — Relations  of  the  Cost  System  to  Accounting 
— Practical  and  Correct  Knowledge  of  Costs  Es- 
sential to  Success  in  Competition — The  Executive 
Must  Understand  His  Costs — Executive  Indiffer- 
ence Responsible  for  the  Weakness  of  Cost-system 
Practice — The  Best  Way  to  Build  a  Cost  System 
— Persistence  and  Time  Are  Essential — A  Proper 
Cost  System  Promotes  Good  Organization,  Pro- 
vides a  Barometer  and  Thermometer  of  Trade, 
and  Insures  against  Unprofitable  Undertakings — 
Standards  by  Which  the  Executive  Must  Test  His 
Cost  System — The  Returns  Which  a  Correct  Cost 
System  Will  Bring  Him 135 


THE  PHILOSOPHY  OF  COSTS 


CHAPTER  I 

THE   PHILOSOPHY  OF   COSTS 

A  N  essential  aim  and  vital  incentive  of  all  manu- 
**•  facture  is  profit.  Profit  is  the  difference 
between  the  selling  price  and  the  cost  of  the  manu- 
factured and  sold  article.  The  selling  price  is  a 
quantity  prearranged  and  known,  logically  based 
on  cost.  Therefore  it  must  be  the  intelligent  and 
necessary  part  of  all  manufacture  to  know  thor- 
oughly and  accurately  its  costs. 

Couple  this  simple  and  logical  statement  with  the 
fact  that  the  means  to  the  end,  the  basic  element  in 
the  structure  of  costs,  is  mathematics  (an  exact 
science  and  in  its  common  and  necessary  terms  uni- 
versally attained),  and  it  must  surely  seem  but  a 
natural  conclusion  that  the  philosophy  of  costs  may 
be  very  plainly  stated  and  readily  understood,  and 
that  its  practice,  in  all  intelligent  business  communi- 
ties, must  be  universal  and  complete.  And  not 
only  is  the  logic  of  the  situation  plain  in  its  demand 
for  right  costs,  but  wherever  the  practice  is  per- 
fected this  logic  is  always  fully  sustained. 

15 


16     COST  REPORTS  FOR  EXECUTIVES 

Notwithstanding  this,  however,  it  is  a  matter  of 
fact  that  the  principles  of  application  of  the  ele- 
ments of  cost  are  as  yet  in  some  dispute,  and  very- 
little  understood  by  those  whose  interests  demand 
a  proper  understanding;  costs  as  practiced  in  the 
larger  percentage  of  plants  bear  no  happy  relation 
in  exactness  to  their  base,  mathematics;  and  one 
need  not  possess  many  of  the  physical  character- 
istics of  a  centipede  to  be  able  to  count  on  the 
ringers  and  toes  those  concerns  which  have  devel- 
oped costs  to  their  highest  value  of  practical  ac- 
curacy and  usefulness. 

Executives  stick  to  the  old  rule-of-thumb  meth- 
ods; sell  at  given  prices  because  their  competitors 
do;  or  cut  these  prices  with  the  idea  of  corraling 
orders,  without  any  certain  knowledge  of  costs,  de- 
pending on  their  business  instinct  to  span  success- 
fully the  gap  between  certain  figures  and  experi- 
ence they  possess,  certain  factors  they  assume,  and 
the  actual  proven  facts  of  the  case.  Time  and  the 
shrewdness  of  the  stronger  and  more  courageous 
in  upholding  prices,  have  come  to  the  relief  of  many 
with  this  lack  of  costs,  but  many  of  them  have  need- 
lessly succumbed  and  gone  to  swell  the  list  of  busi- 
ness tragedies  recorded  by  Bradstreet  and  Dun. 

Now,  an  important  reason  for  this  is  that,  de- 
spite the  importance  of  the  subject  (seldom  prop- 
erly realized  in  any  plant),  the  philosophy  of  costs 
is  not  well  understood  of  many,  being  not  as  simple 


PHILOSOPHY   OF    COSTS  17 

as  might  first  appear,  and,  as  a  measure  of  practice, 
is  not  often  used;  and  so  this  effective  inspiration 
to  proper  development  of  a  cost  system  is  lost. 
Add  to  this  the  more  apparent  and  present  reason 
that  in  a  plant  of  any  size  or  complication  of  prod- 
uct not  only  is  the  daily  detail  of  figures  to  be  as- 
sembled and  sorted  to  their  proper  places  very 
large,  but  what  is  more  difficult  to  cope  with,  the 
accurate  collection  of  them  involves  the  tactful, 
patient  training  of  a  good  deal  of  perverse  and  un- 
intelligent human  nature,  and  frequently  somewhat 
costly  re-arrangement  and  handling  of  material. 
To  these  difficulties  the  executive  (in  a  spirit  of 
economy)  makes  the  further  addition  of  entrusting 
the  task  to  inefficient  or  insufficient  help. 

Nevertheless,  the  day  of  cost  rule  is  dawning. 
Everywhere  cost  systems  are  being  installed,  and 
there  are  few  executives  today  who  do  not  possess 
at  least  the  desire  for  a  complete  cost  system.  But 
the  lack  of  ability  (through  unfamiliarity)  on  the 
part  of  most  of  them  to  recognize  when  a  cost  sys- 
tem is  right,  complete  and  serviceable,  and  the  fear 
of  red  tape  and  the  expense  of  maintaining  it,  de- 
ter too  many  from  obtaining  the  goal  of  their  de- 
sires, and  cause  very  many  unfinished  systems  to 
limp  along  rendering  what  services  they  may. 

Yet  a  thoroughly  effective  and  proved  cost  sys- 
tem may  be  maintained,  when  properly  introduced, 
at  a  very  low  clerical  cost,  and  the  values  obtain- 


18     COST  REPORTS  FOR  EXECUTIVES 

able  from  it  are  alwaj-s  incalculably  greater  than 
this  cost. 

The  philosophy  of  costs  is  of  much  wider  interest 
than  the  mere  logic  of  its  fundamentals.  The  main 
divisions  of  costs  are  simply  stated  and  well  known 
— materials,  direct  labor,  and  expense. 

To  anyone  vitally  concerned,  accuracy  should 
appeal  as  a  first  requisite  of  costs.  It  would  be 
more  appropriate,  however,  and  truer  to  the  facts 
of  the  case,  to  speak  rather  of  practical  than  of 
absolute  accuracy  in  considering  this  quality. 

The  cubical  contents  of  an  iron  tank  can  be  cal- 
culated with  absolute  accuracy,  but  the  cost  to 
manufacture  the  tank  cannot  be  found  with  the 
same  provable  accuracy.  The  contents  of  dupli- 
cate tanks  will  remain  constant.  The  cost  of  dupli- 
cate tanks  may,  however,  from  time  to  time  vary 
markedly. 

This  variation  of  the  cost  of  the  same  article  at 
different  times  constitutes  the  important  point,  not 
only  in  the  proper  understanding,  but  in  the  ap- 
preciation of  costs.  The  ability  to  master  this  point 
and  to  figure  estimates  or  predictions  of  cost  from 
a  standard  under  varying  conditions  gauges  the 
comprehension  or  the  meaning  and  value  of  prac- 
tical costs. 

Now  the  reasons  for  these  cost  variations  are  ap- 
parent upon  consideration  of  the  main  divisions  of 
cost  structure.    The  laws  governing  the  application 


PHILOSOPHY    OF    COSTS  19 

of  cost  in  the  matter  of  material  and  direct  labor 
are  sufficiently  plain  and  direct,  viz. — to  record  the 
actual  expenditures  for  these  two  items  as  applied 
to  the  particular  article  in  question,  since  such  ex- 
penditures can  invariably  be  traced  in  their  direct 
application.  But  the  laws,  or  rather  indeed  the 
rules,  governing  the  application  of  expense  to  the 
cost  of  a  particular  article  are  not  clear  nor  easy 
to  define.  Very  seldom  can  expense  items  be  un- 
questionably charged  to  a  particular  article  cost. 
Many  expenditures  can  be  shown  in  logical  relation 
to  divisions,  classes  of  work,  machines,  or  depart- 
ments of  manufacture,  and  certain  others  are  dis- 
tinctly general  to  the  whole  manufacturing  propo- 
sition, or  divisible  over  sections  of  the  whole  in 
varying  percentages. 

The  necessity  therefore  arises  in  manufacture 
to  make  the  most  logical  and  practical  distribution 
of  expense  to  article  costs  that  will  suit  the  case, 
and  the  logic  of  this  situation  is  so  arguable  that 
experts  frequently  produce  different  results  from 
the  same  conditions.  The  crux  of  cost  comprehen- 
sion is  in  expense  consideration. 

But  there  remains  one  absolute  certainty  in  the 
situation,  viz.,  all  the  expense  is  in  some  way  divis- 
ible over  the  total  product,  and  it  is  a  happy  fea- 
ture of  the  element  of  expense,  that,  once  the 
proper  rules  of  distribution  have  been  decided  upon, 
it  becomes  much  simpler  to  obtain  and  distribute 


20     COST  REPORTS  FOR  EXECUTIVES 

in  costs  than  the  elements  of  material  and  direct 
labor. 

So  it  happens,  then,  that  there  is  in  every  factory 
a  large  general  expense  divisible  over  the  whole 
product,  which,  between  certain  fairly  wide  limits, 
does  not  vary  with  the  product.  It  is  therefore 
plain  that  as  the  production  varies  (and  it  certainly 
varies  in  all  factories)  the  share  of  expense  appli- 
cable to  any  one  article  also  varies,  and  thus  the 
cost  varies  even  when  the  material  and  labor  unit 
cost,  by  prearranged  means,  may  remain  stationary. 
As  the  production  goes  up  the  expense  unit  cost 
goes  down,  and  vice  versa. 

It  is  of  course  this  well-known  fact  of  cost  varia- 
tion, that  increased  production  reduces  cost,  which 
is  at  the  base  of  the  great  struggle  of  the  American 
manufacturer  for  volume — a  struggle  frequently 
made  with  a  trust  simply  in  the  general  principle 
without  concise  and  reasoned  plan;  here  also  is  of 
course  one  of  the  basic  arguments  for  trust  exis- 
tence. 

The  method  of  application  of  expense,  that  is, 
dividing  it  over  all  production,  compels  for  practi- 
cal purposes  the  taking  of  percentages  of  expense 
for  cost  use,  not  in  the  exact  amount  of  its  occur- 
rence during  the  period  of  manufacture  of  a  given 
article,  but  over  a  reasonably  long  period,  and  in 
an  amount  which,  on  account  of  constant  fluctua- 
tions of  expense,  may  be  either  greater  or  less  than 


PHILOSOPHY    OF    COSTS  21 

the  percentage  that  would  be  obtained  for  just  the 
period  of  manufacture  of  the  article  in  question; 
so  that  while  material  and  direct  labor  costs  may 
be  absolute  in  accuracy,  the  expense  can  never  be, 
but  in  relation  to  any  one  article  must  be  approxi- 
mate, being  absolute  only  when  all  costs  are  added 
together. 

These  two  points  then — the  inapplicability  of  ex- 
pense directly  and  in  exact  period  to  the  unit  ar- 
ticle in  the  same  way  as  material  and  direct  labor, 
and  the  consequent  necessity  of  the  division  of  a 
fairly  fixed  expense  by  a  frequently  varying  pro- 
duct— make  the  accuracy  of  cost  practical  rather 
than  absolute. 

But  this  statement  of  the  case  of  accuracy  should 
not  be  misunderstood.  It  is  unfortunately  the  fact 
that  to  this  constitutional  difficulty  of  costs  many 
manufacturers,  who  have  essayed  the  cost  problem 
in  their  plants,  have  added  the  further  and  need- 
less one  of  carelessness  and  incompetence. 

While  the  accuracy  of  unit  order  or  article  cost 
may  not  be  absolute,  the  cost  of  total  product  can 
and  should  be  proved  absolute.  This  can  be  done 
only  by  connecting  it  with  the  accounting  or  book- 
keeping methods  of  the  plant  wherein  should  be 
entered  such  valuable  safeguards  as  depreciation, 
etc.,  so  that  the  trial  balance  of  the  books  shall 
prove  the  whole  proposition  of  accuracy.  In  all 
cases  where  work  is  done  on  order  numbers,  the 


22     COST  REPORTS  FOR  EXECUTIVES 

cost  system  can  most  economically  be  an  integral 
part  of  the  book-keeping,  as  will  be  seen  later.  In 
cases  where  it  seems  inadvisable  to  handle  the  work 
thus  the  proof  with  the  books  is  just  as  sure.  Any 
plant  without  such  connection  has  clearly  not 
understood  the  cost  problem. 

There  is  one  element  essential  in  the  true  philos- 
ophy of  costs,  the  presence  of  which  makes  it  vivid 
and  interesting,  and  the  lack  of  which  makes  the 
practice  either  very  hard  drudgery,  or  slack  and 
inaccurate,  and  the  interpretation  barren, — and  this 
element  is  imagination.  Certainly  the  use  of  costs, 
the  sole  reason  of  their  existence,  has  been  much 
retarded  by  this  absence. 

It  may  not  indeed  be  too  much  to  say  that  this 
lack  has  retarded  the  proper  development  of  costs, 
and  is  not  a  little  responsible  for  the  failure  of  the 
practical  man  to  interest  himself  vitally  in  this  es- 
sential of  his  business.  He  has  left  it,  for  develop- 
ment, solely  to  accountants,  able  as  they  may  be, 
and  for  operation,  to  strictly  office  trained  men, 
generally  of  small  pay;  both  without  that  training 
in  factory  life  and  viewpoint  which  develops  the 
practical  instinct  necessary  to  guide,  through  the 
cold  cost  figures,  that  imagination  which  will  make 
of  a  cost  system  a  panorama  of  the  movements  and 
groupings  of  shop  events. 

It  is  not  to  be  understood  that  imagination  here 
used  is  intended  to  mean  the  luring  up  of  non-ex- 


PHILOSOPHY    OF    COSTS  23 

istent  conditions,  but  it  has  really  two  very  valu- 
able uses  in  practical  results. 

The  executive  sitting  in  his  office  examining  the 
costs  should  be  able,  as  the  figures  run  before  his 
eyes,  to  visualize  the  shop  conditions  to  which  they 
have  reference — the  machines,  the  men,  the  mate- 
rials, the  connecting  operations.  Then,  as  the  fig- 
ures vary  from  the  standard,  imagination  lends 
them  a  meaning  that  urges  results.  For  as  they 
vary  from  this  standard  the  practical  mind  detects 
the  weaknesses  which  ability,  authority  and  direc- 
tion can  correct  to  profit,  or  discovers  evidences  of 
a  strength  worthy  of  effort  for  duplication.  Im- 
agination makes  cost  figures  a  universal  language 
of  manufacturing. 

Thus  may  be  detected  wastes  of  material,  lost 
time  of  labor,  careless  expenditures,  weakness  of 
machinery,  losses  of  profit,  items  for  investigation. 

And  a  further  use  for  imagination,  especially  in 
plants  where  efficiency  has  not  been  highly  devel- 
oped in  a  scientific  manner — and  their  name  is 
legion — is  that  it  will  very  frequently  urge  the  pos- 
sibility of  higher  standards  by  occasional  units  dis- 
covered in  the  cost  system. 

These  losses  and  opportunities  in  very  many 
plants  would  and  do,  without  a  cost  system,  in  all 
probability  take  their  own  long  time  in  coming  to 
corrective  attention. 

As  a  matter  of  fact,  costs  with  imagination  (and 


24     COST  REPORTS  FOR  EXECUTIVES 

indeed  without)  offer  the  modern  plant  one  of  the 
first  steps  and  the  most  urgent  spur  towards  meth- 
ods of  higher  efficiency. 

And  how  well,  with  imagination  as  a  guide,  can 
a  right  cost  system  play  for  the  executive,  returned 
from  an  absence  from  his  plant,  the  drama  of  shop 
life,  the  moving-picture  show  of  its  practice,  the 
course  of  production,  wastes,  labor,  making  clear 
the  tragedy  of  losses  and  the  comedy  of  successes! 
In  fact,  the  business  man  can  safely  leave  his  plant 
under  such  conditions,  satisfied  that  upon  his  re- 
turn he  can  know  with  some  surety  that  it  has  op- 
erated as  well  as  usual,  or  where  it  has  failed  to  do 
so.  While  figures  form  the  body  of  costs,  imag- 
ination gives  them  a  soul. 

Now,  for  the  right  and  best  exercise  of  this  imag- 
ination in  costs  there  is  necessary  another  element 
— practical  instinct.  To  get  the  best  value  from  a 
cost  system  without  the  practical  instinct  is  some- 
thing like  trying  to  master  a  foreign  language  with 
the  sole  aid  of  a  dictionary  and  a  grammar.  The 
practical  instinct  is  not  essentially  confined  to  the 
practical  factory  man.  Indeed  he  does  not  always 
possess  it.  But  it  requires  a  practical  mind  which 
at  least  readily  learns  shop  conditions  by  observa- 
tion, analysis,  and  by  shrewdly  questioning  the 
practical  men. 

This  practical  instinct,  urged  by  the  desire  to 
make    improvement    and    aided    by    imagination, 


PHILOSOPHY    OF    COSTS  25 

reads  the  message  of  costs  and  by  inspiration,  in- 
quiry, suggestion  and  scientific  investigation  finds 
methods  of  improvement.  When  costs  have 
brought  about  this  they  have  accomplished  one  of 
their  highest  and  most  practical  values.  Practical 
instinct  not  only  makes  of  use  the  figures  presented, 
but  likewise  performs  a  very  valuable  function  in 
preventing  (what  happens  in  very  many  plants) 
the  compiling  of  masses  of  figures  which  have  no 
practical  or  complete  value. 

Another  element  essential  in  cost  consideration 
should  not  be  overlooked  too  long — viz.,  standards. 
Efficiency  is  attained  only  by  a  striving  for  high 
standards.  These  standards  may  vary  in  their  or- 
igin in  different  plants.  They  may  far  best  be 
scientifically  worked  out;  they  may  be  fixed  at  a 
desirable  percentage  below  the  selling  price;  they 
may  be  the  best  previous  record;  they  may  be  the 
mark  set  by  a  competitor,  as  the  conditions  of  ad- 
vancement of  the  plant  along  the  line  of  struggle 
for  best  methods  may  dictate;  but  of  course,  for 
best  results,  they  should  be  the  highest  standards. 
The  jumper  strives  for  a  mark  beyond  his  best 
reach.  Human  nature  demands  a  goal,  but  the 
standard  should  not  be  unattainable. 

We  are  led  naturally  from  standards  to  compari- 
sons as  an  essential  element  in  the  philosophy  of 
costs.  Costs  are  not  stable.  With  the  best  effort 
they  vary  constantly  and  sometimes  markedly,  while 


26     COST  REPORTS  FOR  EXECUTIVES 

selling  prices  vary  slowly  when  at  all.  Comparison 
with  standards  and  with  other  costs  as  representa- 
tives of  conditions,  brings  effectively  to  the  practi- 
cal mind  those  points  valuable  for  investigation  and 
action. 

As  far  as  possible  the  practical  mind  should  be 
used  in  consideration  of  as  few  figures  as  possible, 
and  these  the  vital  ones.  We  are  thus  led  to  an- 
other very  important  and  frequently  fatally  over- 
looked point — arrangement. 

It  is  a  psychological  fact  that  the  human  mind, 
and  especially  the  practical  executive  mind  accus- 
tomed to  deal  rapidly  with  conditions  as  they  arise, 
becomes  fatigued  with  long  consideration  of  fig- 
ures and  the  attempt  to  extract  important  facts 
from  them.  This,  therefore,  makes  it  important 
that  through  arrangement  there  should  be  brought 
quickly  to  the  attention  the  important  indicative 
figures,  and  the  detail,  likewise  carefully  arranged, 
may  then  be  gone  into  only  as  the  variation  of  the 
important  indices  from  the  standards,  or  the  nor- 
mal inquisitiveness  of  the  executive  demands. 
Thus  the  discerning  mind  can  with  vigor  and  fresh- 
ness cover  the  entire  field,  and  at  the  same  time 
quickly  get  to  the  bottom  of  any  situation.  It  may 
be  valuable  to  suggest  here  also  that  cost  figures 
should  be  in  such  detail  that,  with  practical  knowl- 
edge of  the  situation,  there  shall  be  no  necessity  to 
delay  investigation  while  further  analysis  is  carried 


PHILOSOPHY    OF    COSTS  27 

on.  The  figures  of  detail  should  picture  the  facts 
simply.  As  a  matter  of  practical  fact  the  cost  sys- 
tem is  most  effective  where  the  cost  clerk  is  of  such 
calibre  as  to  be  able  to  select,  investigate,  and  re- 
port upon  those  instances  where  the  variations  of 
costs  indicate  weakness  or  possibilities  of  better- 
ment. 

An  important  element  essential  to  valuable  costs, 
and  one  often  overlooked,  is  periodicity,  or  prompt- 
ness of  results  after  occurrence.  The  promptness 
or  speed  with  which  a  cost — the  picture  of  an  event 
or  concourse  of  events — shall  be  produced,  depends 
of  course  on  the  nature  of  the  event,  the  space  of 
time  it  covers,  and  its  relation  in  economic  value 
to  succeeding  events.  Too  little  is  it  understood 
and  practiced  that  all  expenditures  should  best  be 
studied  before  made,  as  to  their  value  and  relation 
to  the  whole;  and  it  is  quite  possible  in  a  well  ar- 
ranged shop  where  a  good  cost  system  prevails  to 
predict  fairly  accurately  many  costs.  But  of  costs 
after  the  fact,  which  will  always  be  the  great  value 
in  any  cost  system,  it  is  of  course  as  ridiculous  to 
call  to  the  attention  daily  the  day's  share  of  taxes, 
as  it  is  to  bring  forward  the  costs  of  a  certain  minor 
operation  a  month  after  its  occurrence.  The  neces- 
sities of  the  case  will  vary  in  different  plants,  but 
in  most  the  facts  are  practically  to  be  considered 
thus :  ( 1 )  wastes,  daily  and  in  relation  to  the  order 
or  run;  (2)  operation  costs,  daily  in  relation  to  the 


28     COST  REPORTS  FOR  EXECUTIVES 

article  and  machine;  (3)  order  costs,  the  day  after 
the  order  is  finished,  or  once  a  week;  (4)  produc- 
tion, varying  with  the  kind  of  product  by  the  day, 
run,  or  week;  (5)  the  payroll,  consideration  by  the 
week;  (6)  special  expenses  by  the  job,  and  (7) 
general  expenses  by  the  month.  Familiarity,  prac- 
tice, and  control  of  the  situation  modify  these  times 
of  presentation,  but  that  system  which  can  not  ap- 
proximate a  desired  schedule  is  weak,  and  values 
are  being  wasted. 

When  a  cost  system  is  finally  in  operation  there 
is  one  essential  to  its  greatest  effectiveness  which 
is  much  too  seldom  considered — viz.,  co-operation 
of  the  executive  organization  in  its  study  and  use. 

In  a  plant  of  any  size  it  is  impossible  for  one 
man,  the  executive,  to  keep  under  his  control  all 
decision  and  action.  He  must  necessarily  delegate 
it  in  varying  degrees  along  down  the  line  of  his  or- 
ganization. Gradually,  as  the  press  of  his  duties 
demands  and  confidence  in  his  subordinates  per- 
mits, he  leaves  more  and  more  to  these  subordinates. 
Now  it  is  only  the  merest  common  sense  to  consider 
that  if  a  cost  showing  of  the  facts  is  valuable  and 
necessary  to  the  executive  in  his  decisions  and  ac- 
tions, it  is  all  the  more  so  to  his  subordinates,  since 
while  their  sphere  of  action  is  smaller,  likewise  it  is 
generally  a  fact  that  their  ability  to  cope  with  the 
situation  is  smaller.  Moreover,  if  the  cost  system 
is  an  enlightenment  to  the  executive,  why  should 


PHILOSOPHY    OF    COSTS  29 

his  subordinates  be  compelled  to  work  in  the  dark? 
But  even  from  a  broader  point  of  view  it  is  a  cer- 
tainty that  in  any  organization  greater  results  are 
to  be  obtained  by  co-operation  of  many  minds  in- 
timate with  a  subject  (and  subordinates  are  gener- 
ally more  intimate  with  the  details  than  the  execu- 
tive), than  from  one  mind. 

Many  executives  will  object  that  they  do  not  de- 
sire their  subordinates  to  be  familiar  with  the  fig- 
ures of  their  business ;  but  if  a  previous  essential — 
right  arrangement  of  the  cost  system — is  had,  no 
subordinate  need  see  any  portion  except  that  which 
concerns  his  work  especially,  or  such  other  figures 
as  the  executive  pleases  to  show  him,  and  in  no  case 
need  he  see  the  final  results  in  the  trial  balance. 
The  cost  system  has  not  obtained  its  highest  value 
until  it  has  met  the  co-operation  of  the  organiza- 
tion in  its  study  and  use. 

Many  of  those  who  have  spent  considerable  sums 
in  maintaining  a  cost  system,  have  overlooked,  in 
considering  its  final  economic  value,  what  proves  to 
be  its  main  virtue  after  the  passing  of  that  period 
of  a  year  or  more  during  which  the  initial  knowl- 
edge presented  of  costs  of  articles  in  relation  to 
their  selling  prices  has  brought  about  desired  read- 
justments. This  virtue  lies  in  the  use  of  the  cost 
system  as  a  means  of  control  of  factory  depart- 
ments and  divisions,  and  as  a  basis,  not  merely  of 
reduction  of  cost  of  a  particular  article,  but  of  ac- 


SO     COST  REPORTS  FOR  EXECUTIVES 

tions  tending  to  reduce  in  cost  the  whole  line  of 
manufacture,  or  to  changes  in  any  direction  looking 
towards  betterment. 

This  latter  conception  of  the  value  of  costs  is  the 
broader  and  more  intelligent,  and  properly  involves 
the  keeping  of  all  statistics  under  the  head  of  the 
cost  system.  As  a  means  of  gauging  and  control- 
ling operations,  divisions,  departments,  wastes,  pro- 
duction, and  relation  of  controllable  and  uncon- 
trollable conditions  to  the  whole  situation — of  dis- 
covering, in  fact,  the  real  status  of  the  plant  as  a 
basis  and  gauge  for  working  it  intelligently  toward 
betterment  (for  which  purpose  the  trial  balance  is 
in  a  large  percentage  of  cases  a  very  crude  instru- 
ment) the  right  cost  system  has  large  opportuni- 
ties of  development  before  it.  The  value  of  costs 
in  relation  to  a  particular  article  is  in  no  sense  to  be 
belittled  as  a  basis  for  economic  action,  in  addition 
to  its  value  as  a  selling  basis;  but  it  is  very  plain, 
that,  while  an  economy  inspired  by  such  cost  fig- 
ures may  lead  to  a  further  economy  throughout  a 
whole  varied  product,  there  are  many  details  in  it 
that  are  only  subdivisions  of  some  expense  general 
to  many  or  all  articles,  and  such  divisions  do  not 
lend  themselves  to  criticism.  But  an  action  based 
on  a  showing  of  the  situation  as  a  whole  will  gen- 
erally lead  to  a  reduction  all  along  the  line.  And 
it  is  true  that  many  expenditures  are  not  properly 
valued  until  their  relation  to  the  whole  situation  is 


PHILOSOPHY    OF    COSTS  31 

shown  and  balanced  against  the  advantages  ren- 
dered. Only  this  broader  view  and  use  of  costs 
offers  a  brief  for  proper  judgment.  As  the  devel- 
opment of  the  idea  of  standards  progresses,  this 
broader  view  will  offer  a  means  of  gauging  the 
whole  with  a  standard;  for  just  as  there  should  be 
standards  for  the  smaller  units,  so  there  should  be 
standards  for  the  larger,  for  groups  of  units,  and 
for  the  whole. 

This  broader  use  of  cost  system  as  a  means  of 
control  of  the  business,  comes  most  effectively,  how- 
ever, only  with  a  thorough  understanding  of  cost 
system,  in  its  proper  arrangement  and  use  with 
imagination  and  practical  instinct,  and  of  the  phi- 
losophy of  costs,  but  it  gives  a  wider  and  more  com- 
prehensive view  of  factory  life  than  personal  super- 
vision and  the  trial  balance  can,  since  the  one  dis- 
covers only  local  and  momentary  action,  and  the 
other  shows  the  final  result  too  much  condensed 
and  too  composite. 

Such  a  use  does  not  demand  a  different  or  sepa- 
rate arrangement  from  that  necessary  in  obtaining 
article  or  order  costs,  but,  in  fact,  the  proper  ar- 
rangement for  it  makes  more  simple  the  obtaining 
of  such  costs.  And  with  such  proper  arrangement 
in  a  well  organized  or  controlled  factory  it  carries 
the  setting  for  a  quick  assembling  of  predicted  costs 
or  estimates. 

To  be  able  to  predict  costs  accurately  in  advance 


32     COST  REPORTS  FOR  EXECUTIVES 

is  a  longer  step  forward  in  factory  management 
than  may  at  first  be  thought,  for  it  indicates  a  high 
state  of  development  of  proper  methods.  But  it 
is  very  easy  to  do,  confidently,  when  two  conditions 
exist  in  the  factory — good  methods  of  control  of 
labor  and  material,  and  a  good  cost  system. 

A  point  of  much  commercial  importance,  and 
one  in  which  again  the  apparent  logic  of  the  situa- 
tion does  not  furnish  a  complete  answer,  is  afforded 
in  the  fact  that,  though  the  cost  of  an  article  may 
prove  to  be  higher  than  the  selling  price  and  thus 
show  a  unit  loss,  it  does  not  necessarily  increase 
the  total  profit  of  operation  to  cease  the  manufac- 
ture and  sale  of  articles  thus  showing  a  loss.  The 
reason  is  plain  enough  on  a  consideration  again  of 
the  fact  that  general  expense  has  no  direct  appli- 
cation in  the  cost  of  any  particular  article,  but  that 
the  expense  portion  of  individual  cost  is  only  ob- 
tained by  dividing  total  expense  over  total  pro- 
duction. It  follows  then  that  when  any  line  of 
production  is  cut  out,  the  share  of  general  expense 
its  cost  has  absorbed  must  simply  fall  additionally 
on  the  remaining  product.  It  is  therefore  a  matter 
of  simple  mathematical  proof  that,  even  when  costs 
show  losses  on  individual  articles,  the  change  of  the 
total  profit  upon  the  elimination  of  any  article 
varies  with  the  relation  of  this  loss  to  the  expense 
apportioned  to  this  article.  When  the  loss  is 
greater  than  the  apportioned  general  expense,  ces- 


PHILOSOPHY    OF    COSTS  33 

sation  of  manufacture  increases  the  total  profit. 
When  the  loss  is  less  than  the  expense  burden,  ces- 
sation of  manufacture  decreases  the  total  profit. 
Here  then  is  a  law,  the  application  of  which  is  fre- 
quently needed  in  plants  developing  cost  systems, 
for  such  plants  discover  that,  through  ignorance, 
they  have  been  selling  some  articles  under  cost,  and 
the  solution  is  one  requiring  careful  review  of  the 
selling  and  manufacturing  situations,  and  the  use 
of  common  sense.  Theoretically  it  is  right  that  all 
articles  should  be  sold  at  a  fair  profit,  but  competi- 
tion inclines  to  make  this  a  fair  profit  on  the  cost 
of  the  most  efficient  manufacture,  and  ignorance 
of  cost  has  frequently  aided  competition  to  make 
the  manufacture  of  some  articles  unprofitable  to 
all.  And  outside  of  this  consideration  of  profit 
there  enter  many  other  reasons  that  seem  to  com- 
pel some  concerns  to  sell  articles  at  an  individual 
loss,  such  as  the  necessity  of  completing  a  line  with 
a  losing  article  as  a  leader,  paralleling  a  competitor 
to  sell  the  profitable  part  of  a  line,  keeping  up  pro- 
duction in  an  expensive  organization  or  equipment, 
or  in  dull  times. 

In  the  consideration  of  higher  cost  of  living  the 
element  of  increasing  knowledge  of  costs  has  never 
been  given  much  weight.  Yet  it  is  not  impossible 
that  it  has  had  its  effect.  Many  associations  of 
manufacturers  have  realized  in  the  last  ten  years 
the  ruinous  effect  of  ignorant  competition  and  met 


34     COST  REPORTS  FOR  EXECUTIVES 

it  by  adopting  uniform  cost  systems.  In  their  work 
it  has  proven  to  be  more  important  that  all  manu- 
facturers in  one  line  should  handle  like  items  of  ex- 
pense alike  than  that  they  should  handle  them  ac- 
cording to  any  definite  rule.  It  is  proving  for 
these  associations  an  eminently  wise  action,  al- 
though they  have  hardly  begun  to  reap  the  benefits 
because  of  two  unfortunate  difficulties  in  the  con- 
sideration of  cost  system.  These  difficulties  come 
about  through  a  lack  of  understanding  and  appre- 
ciation of  the  true  philosophy  of  costs  and  certain 
psychological  traits  that  show  themselves  invaria- 
bly with  executives  in  the  matter  of  costs.  The  first 
difficulty  is  the  fatal  hesitation  and  delay  which 
most  executives  display  in  having  a  complete  cost 
system  installed  in  their  plants.  They  have  gener- 
ally worked  out  some  rough  figures  of  cost,  and 
their  familiarity  with  the  situation  and  the  articles, 
and  their  ignorance  of  the  possibilities  to  be  ob- 
tained from  a  discriminating  and  proved  cost  sys- 
tem, lead  them  to  believe  that  with  these  incom- 
plete figures  their  understanding,  guided  by  their 
common  sense  and  business  instinct,  gives  them  all 
the  control  there  is  to  be  had  of  the  matter.  In- 
deed there  seems  to  be  some  fatal  insidiousness 
about  costs,  aided  by  the  fear  of  detail,  whereby 
the  executive  easily  satisfies  himself  when  he  has 
gone  part  way  in  development  of  a  cost  system. 
He  does  not  sufficiently  consider  that  while  it  may 


PHILOSOPHY    OF    COSTS  35 

be  true  that  figures  do  not  lie,  when  they  represent 
costs  they  must  be  cross-examined  quite  severely 
to  get  the  whole  truth  out  of  them. 

Nothing  but  the  actual  possession  of  a  right  cost 
system,  proving  its  value,  ever  changes  this  view  of 
the  executive  entirely ;  but  this  always  changes  it. 

The  second  difficulty  is  that  in  most  plants,  when 
the  executive  has  consented  to  install  a  proper  sys- 
tem, it  takes  so  much  longer  to  get  into  active  op- 
eration, and  there  appear  so  many  more  delaying 
difficulties  of  human  nature  or  rearrangement  than 
he  is  accustomed  to  in  putting  through  the  usual 
improvements,  that  he  frequently  stops  somewhere 
short  of  the  desired  and  necessary  result.  In  the 
ordinary  shop  at  least  a  year  of  hard  work  and 
hearty  co-operation  is  necessary  to  bring  about  a 
thoroughly  right  cost  system. 

The  future  of  costs  is  sure,  because  the  logic  of 
them,  as  displayed  in  the  first  paragraph,  is  now 
indisputable,  and  as  time  goes  on  will  make  them 
indispensable. 

Common  sense  urges  their  value,  for  certainly 
the  executive  who  depends  on  his  judgment,  ability 
and  experience  and  that  of  his  organization,  loses 
none  of  that  value  when  he  possesses  in  addition  a 
cost  system ;  but  he  gains  an  added  help  and  guide, 
and  furnishes  his  organization  that  which  human 
nature,  for  spurred  effort,  finds  indispensable — a 
merciless  gauge  as  to  the  real  results  of  their  com- 


36     COST  REPORTS  FOR  EXECUTIVES 

bined  efforts.  And  as  the  science  of  management 
advances,  cost  system  will  be  more  necessary  to  as- 
sure and  sustain  the  high  level.  But  promised  re- 
sults will  not  be  accomplished  without  a  right  cost 
system.    What  then  is  a  right  cost  system? 

A  right  cost  system  is  a  proved  cost  system,  so 
designed  that  whether  operated  through  the  book- 
keeping system,  or  with  the  book-keeping  system, 
the  figures  presented  in  total,  in  sections,  in  divis- 
ions, in  departments,  in  order  costs,  in  article 
cost  or  in  operation  cost,  the  facts  as  pictured 
bjr  the  figures,  are  proven  with  the  balanced 
book-keeping  system  to  include  all  items  of  mate- 
rial, labor,  expense,  plus  such  items  of  conservation, 
in  depreciation,  etc.,  as  may  be  decided  upon.  Add 
to  this  an  understanding  of  the  philosophy  of  costs 
in  interpreting  the  figures,  and  the  highest  ideal 
of  cost  value  is  attained. 

To  recapitulate,  then,  the  ideal  cost  system  is 
one, — 

Proven  with  the  books, 
Operated  in  practical  accuracy, 
Visualized  with  imagination, 
Interpreted  with  the  practical  instinct, 
Braced  with  standards, 
Vivified  by  comparisons, 
Made  simple  by  arrangement, 
Made  effective  by  prompt  periodicity, 


PHILOSOPHY    OF    COSTS  37 

Made  active  by  co-operation  of  organization  in 
study  and  use, 

and  one  that  not  only  gives  article  or  order  costs 
and  the  necessary  details  thereof,  but  gives  division 
or  department  costs,  and  the  vital  details  of  these 
for  control  of  the  parts  and  the  whole.  Operated 
thus  a  cost  system  becomes  not  merely  a  valuable 
practical  asset,  but  it  becomes  an  enjoyment  in  the 
game  of  business. 


1581 


THE  PLACE  OF  THE  TRIAL  BALANCE 
IN  THE  COST  SYSTEM 


CHAPTER  II 

THE  PLACE  OF  THE  TRIAL  BALANCE  IN  THE 
COST  SYSTEM 

TN  the  ordinary  practice  of  the  cost  systems  of 
*■  today  the  relation  of  the  trial  balance  to  the 
costs  is  very  distant,  and  not  infrequently  the  con- 
nection is  untraceable  absolutely.  The  trial  bal- 
ance is  considered  as  a  monthly  means  of  proving 
the  accuracy  of  the  book-keeping  but,  as  a  means 
of  indicating  to  the  executive  any  facts  about  the 
operation  of  the  plant,  it  becomes  interesting  only 
after  stock-taking  periods. 

Yet,  as  a  matter  of  fact,  while  the  general  prac- 
tice has  not  borne  it  out,  the  book-keeping  system, 
of  which  the  trial  balance  is  only  the  periodical 
statement  of  balances,  is  the  right  and  natural  cost 
system.  It  has  not  assumed  its  position  as  such 
merely  because  it  has  followed  the  lines  of  least  re- 
sistance. It  was  always  intended  to  tell  the_story 
of  the  business  in  a  complete  manner;  but,  in  the 
grand'majority  of  cases,  the  system  developed  to 
include  only  those  items  that  came  naturally  and 
necessarily  to  the  book-keeper  in  the  form  of  bills 
paid  or  to  be  paid,  and  bills  collected  or  to  be  col- 
lected— because  all  other  items,  analyses  of  these 
bills,  indicating  internal  events,  proved  too  difficult 

41 


42     COST  REPORTS  FOR  EXECUTIVES 

to  collect  accurately,  when  at  all.  Not  that  this 
development  is  to  be  condemned,  because  this  much 
has  proven  very  valuable  and  essential,  and  the  dif- 
ficulties of  obtaining  through  the  book-keeping  sys- 
tem a  complete  series  of  costs,  and  thus  a  trial  bal- 
ance giving  a  complete  monthly  showing  of  the 
business,  are  such  as  are  not  easy  to  be  overcome. 

Yet  there  are  two  vital  reasons  why  the  costs 
should  be  a  part  of  the  book-keeping  system,  and 
why  the  latter  should  universally  assume  the  dig- 
nity and  value  of  the  recital  of  a  complete  story, 
and  not  be  compelled  to  have  the  cost  system  as  its 
sequel. 

In  the  first  place,  the  book-keeping  system  offers 
absolutely  the  only  means  of  proof  of  a  cost  sys- 
tem. 

In  the  second  place,  the  trial  balance  offers  the 
only  possible  complete  representation  of  the  condi- 
tion of  the  business. 

Connect  the  cost  system  properly  with  the  book- 
keeping system,  and  the  trial  balance  tells  the  whole 
story  monthly.  If  the  trial  balance  is  the  only  pos- 
sible proved  monthly  showing  of  the  facts  of  the 
business,  it  is  only  common  sense  to  cause  it  to 
show  these  facts  in  the  plainest  and  most  complete 
manner.  It  is  therefore  right  and  natural  that,  in 
any  plant  where  a  complete  cost  system  is  at- 
tempted, it  should  be  put  through  the  book-keep- 
ing system,  since  the  trial  balance  will  then  prove 


TRIAL    BALANCE    AND    COST    SYSTEM        43 

the  situation,  and  show  in  the  totals  for  the  whole 
plant,  what  the  cost  system  shows  in  detail  for 
orders  or  articles. 

Such  a  trial  balance  in  the  ordinary  plant  would 
be  much  like  Form  1.  The  description  of  it  may 
not  be  fascinating,  but  any  executive  who  pos- 
sesses such  a  monthly  showing  of  his  plant  will 
certainly  find  the  real  thing  decidedly  so.  In  this 
illustration,  it  makes  no  difference,  of  course, 
whether  the  figures  represent  an  actual  case,  or 
whether,  indeed,  they  represent  the  kind  of  finan- 
ciering or  managing  that  would  be  done  by  a  cap- 
tain of  industry  or  his  more  modern  place-taker, 
the  scientific  manager.  They  are  merely  represen- 
tative of  the  method. 

Observe  then  Form  1.  No  explanation  will  be 
necessary  for  the  divisions: — Quick  Assets,  Quick 
Liabilities,  Permanent  Assets,  Permanent  Liabili- 
ties, Income  on  Investments,  and  Interest  and  Dis- 
count.   They  are  common  to  all  trial  balances. 

The  "Manufacturing  Accounts"  are  the  interest- 
ing ones  to  the  alert  executive.  The  account,  "Raw 
Materials  on  Hand"  means  just  what  it  says,  viz., 
the  value  in  dollars  and  cents  of  raw  material  that 
should  be  on  hand  at  the  end  of  each  month,  if  an 
actual  inventory  were  taken.  The  terms  "Class  1, 
2,  3,  4,  5,"  are  used  simply  in  place  of  significant 
names  of  materials  varying  in  kind  and  variety  in 
different  plants. 


44     COST  REPORTS  FOR  EXECUTIVES 

The  account  "Cost  of  Work  in  Process"  likewise 
states  its  own  case,  and  shows  the  value  in  dollars 
and  cents  tied  up  in  unfinished  orders  in  the  dif- 
ferent classes  of  work  at  the  end  of  the  month. 

Under  the  head  of  "Profit  and  Loss  Account" 
there  appears  the  actual  accumulated  profit  or  loss 
on  the  sales  of  the  several  classes.  Under  this  ac- 
count there  appears  also  "Unused  Supplies" — 
meaning  the  value  of  expense  supplies  on  hand  at 
the  end  of  the  month,  and  the  account  "General  Ex- 
pense Undivided"  covers  such  items  as  are  not  dis- 
tributed in  the  costs  each  month,  as  the  unused 
taxes,  insurance,  etc.,  which  items,  though  paid  gen- 
erally once  a  year,  should  be  distributed  to  costs 
only  in  equal  monthly  amounts,  while  the  balance, 
being  prepaid,  remains  as  an  asset  until  used. 

Perhaps  it  might  be  well  to  indicate  briefly  how 
this  trial  balance  is  made  possible.  It  will  be  re- 
membered that  it  is  the  culmination  of  the  cost 
system.  The  cost  system,  if  it  exist  at  all,  must 
show  the  material,  labor,  and  expense  chargeable 
to  each  article  or  order  made.  Granted  this,  then 
(for  such  a  trial  balance  cannot  be  drawn  out  of 
the  thin  air)  the  process,  to  be  shown  later  in  more 
detail,  is  very  simple.  The  raw  material  when 
bought  is  charged  to  the  "Raw  Material"  account. 
The  raw  material  values  used,  collected  through  the 
cost  system,  are  credited  monthly  to  the  "Raw  Ma- 
terial" account,  thus  leaving  only  the  value  of  un- 


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FORM  l— TRIAL  BALANCE 

April    30,    1911                               1      1911 

June  30.   1911 

i,n  i.  :;    U-j.i  9 

On. 

Cb.         j             n» 

Cb. 

D«. 

C». 

Cash                                               10,817.19 
Petty  Cash                               j         200.00 
Accounts  Received              f  51,619.15 

8,156.19 
200.00 

9,872.16 
200.00 

45,112.12 

55,116.12 
10,000.00 

Bills  Received                        15,000.00 

15,000.00 

Total 

68,468.31 

75,188.28 

Quick  Liahimtiks 

Accounts   Payable 
Bills   Payable 

42,800.27 
30,000.00 

40,100.16 
24,000.00 

30,100.18 
30,000.00 

Total 

72,800.27 

64,100.16 

60,100.18 

PSRMAHBMT    ASSI   N 

Real  Estate 

!00,000.00 

200,000.00 

200,000.00 

Machinery 

Investments 

75,000.00 

10,200.00 

75,000.00 
10,200.00 

75,000.00 
10,200.00 

Total 

285.200.00 

285,200.00 

285,200.00 

Permanent  Liabilities 

Capital  Stock 

200,000.00 

200,000.00 
145,066.59 

200,000.00 
145.066.59 

Surplus 

Depreciation 

L45.066.59 

52,000.00 

'  f 

J     Total 

597,066.59 

H,    LTMcnnni'  Accounts 

c 

Raw  Materials  on  Hand: 
Class  1 

875.22 

815.16 

628.92 

Class  2 

3,861.19 

5,522.66 

8,818.60 

Class  3 
Class  4 

28,514.12 

34,115.19 
2,000.15 

31,116.86 

1,892.11 

2,108.17 

Class  5 

34,561.17 

40,116.12 

39,626.18 

Totals 

69,703.81 

82,569.28 

81,298.73 

Cost  01   Wi.ih  in-  Process 

Class  A 
Class  B 

5,187.16 
322.49 

8,173.69 
4,116.56 

7,961.73 
5,623.17 

Class  C 

15,916.22 

8.511.12 

9.161.15 

Class  D 

34,115.19 

32,115.16 

28,171.77 

Totals 

56,541.06 

52,916.53 

FniuiT  and  Loss  Account 

Gen'lExp.,  Undivided 

1,112.06 

962.07 

812.14 
5,638.02 

1,633.14 

Unused  Supplies 
Interest  and  Discount 
Income  on  Investments 

6,006.06 

6.014.18 

1,268.19 

1,422.15 

318.00 

318.00 
15,050.96 

420.00 

Profit  Class  A 

12,016.15 

18,090.08 

3,393.38 

Class    C                                                        2,612.15 

3,815.3! 

10,519.16 

14,119.34 

16,320.97 

7,520.30 

7,325.43 

Ou«.   To™* ^96. SOI. 51  ^96,601.51 

496 ,  479 .  58  jl99 ,  446 .  34 

A 

FORM  2— SUB-STATEMENT,  TRIAL  BALANCE 


April  30,  1911 


May  31,  1911 


),  1911 


June  30,  1911 

Month  I'i  EIIO0 


9,216.42 
541.18 


40,206.72 
4,100.73 
10 

65,635.63 

) 


Items  Preceded  by  Letter  L  Represent  Losses 


NOTE.  This  sub-statement  of  the  trial  balance 
offers  further  detail  and  percentages  of  profit  or 
loss  on  classes  of  manufacture  A,  B,  C,  D,  the 
amounts  of  which  are  shown  under  Profit  and  Loss  at 
the  foot  of  the  Trial  Balance,  Form  1.  All  the  facts 
shown  are  obtainable  from  the  ledger  accounts,  of 
which  the  amounts  under  heads  Profit  and  Loss  on  the 
Trial  Balance  are  the  balances,  and  this  sub-state- 
ment is  merely  a  quick  and  clear  analysis  to  point 
for  the  Executive  the  strong  and  weak  spots  as  to 
volume  and  value  of  his  different  line  of  manufac- 
ture, indicating  the  directions  his  efforts  may 
best  take. 


This  sub-statement  of  the  trial  balance 
further  detail  and  percentages  of  profit  or 
a  classes  of  manufacture  A,  B,  C,  D,  the 
s  of  which  are  shown  under  Profit  and  Loss  at 
ot  of  the  Trial  Balance,  Form  1.   All  the  facts 
are  obtainable  from  the  ledger  accounts,  of 
the  amounts  under  heads  Profit  and  Loss  on  the 
Balance  are  the  balances,  and  this  sub-state- 
3  merely  a  quick  and  clear  analysis  to  point 
e  Executive  the  strong  and  weak  spots  as  to 
and  value  of  his  different  line  of  manufac- 
indicating  the  directions  his  efforts  may 
ake. 


TRIAL  BALANCE  AND  COST  SYSTEM   45 

used  material,  and  are  charged  to  the  cost  of  work 
in  process.  To  this  account,  "Cost  of  Work  in 
Process,"  is  likewise  charged  all  the  direct  labor 
paid  for  monthly,  since  it  is  all  used,  and  also  all 
expense,  except  such  items  of  the  latter  as  remain 
legitimately  in  "General  Expense  Undivided,"  and 
"Unused  Supplies."  Thus  each  month  all  money 
spent  on  production  is  charged  to  "Cost  of  Work 
in  Process."  As  shipments  are  made  their  costs 
are  credited  to  the  "Cost  of  Work  in  Process,"  and 
charged,  under  "Profit  and  Loss"  account,  to  the 
class  into  which  they  fall,  the  sale  prices  being  cred- 
ited at  the  same  time,  thus  making  the  balance  show 
the  net  profit  or  loss. 

Now  the  accounts  under  "Profit  and  Loss,"  by 
classes,  are  not  sufficiently  significant  in  themselves 
on  the  trial  balance  sheet,  since  they  do  not  indicate 
the  size  of  the  sales  on  which  they  are  the  profit  or 
loss.  To  remedy  this  a  sub-statement  is  drawn 
from  the  ledger  accounts  very  readily,  and  shows  as 
per  Form  2.  Thus  may  be  seen  the  sale,  the  profit 
or  loss,  and  the  percentage  of  profit  or  loss,  for  the 
month  and  for  the  period  to  date,  on  each  class  and 
on  all  classes. 

It  will  be  noted  that  the  periods  of  trial  balance 
indicated  are  the  usual  monthly  periods.  This  is 
called  to  attention  because  there  is  some  movement 
to  have  strictly  four-week  periods  of  trial  balance. 
Of  course,  there  can  be  no  violent  objection  to  this 


46     COST  REPORTS  FOR  EXECUTIVES 

if  it  offers  advantages  sufficient.  The  disadvan- 
tages of  this  method  are  that  it  causes  thirteen  in- 
stead of  twelve  trial-balance  labors,  and  it  is  against 
the  custom  of  the  calendar  and  the  practice  of  the 
day.  This  latter  is  not  necessarily  an  essential  ob- 
jection if  the  advantages  offered  are  sufficient.  The 
main  advantage  of  the  four-week  trial  balance  is 
that  it  offers  equal  periods  for  comparison  at  all 
times.  But  as  a  matter  of  fact  it  would  seem  that 
with  a  first-class  cost  system  in  operation,  this  is 
not  a  very  valuable  advantage,  since  in  the  matter 
of  expense  weekly  comparisons  offer  a  much  bet- 
ter grip  and  comparison,  and  in  other  matters  the 
vital  points  of  comparison  appear  in  other  data,  as 
weekly  payroll,  order  costs,  etc.  It  would  there- 
fore seem  that  since  Cassar  inaugurated  the  calen- 
dar, and  custom  and  use  has  fixed  it  as  a  universal 
basis  of  time,  until  some  greater  use  than  is  yet 
stated  for  four-weekly  trial  balances  is  shown,  or 
until  the  calendar  is  changed,  the  majority  will 
make  no  mistake  in  this  matter  in  rendering  unto 
Csesar  the  things  that  are  Caesar's. 

Behold,  then,  the  executive  has  on  his  desk  once 
a  month  a  complete  and  condensed  showing  of  his 
business.  Every  month  is  inventory  time  with  him, 
as  far  as  results  go.  Can  he  use  such  a  showing 
for  the  betterment  of  results?  It  may  indeed  be 
said  here  that  in  my  own  experience,  every  plant 
manager  who  has  arrived  at  this  culminating  point 


TRIAL  BALANCE  AND  COST  SYSTEM   47 

in  the  development  of  a  cost  system  has  not  only 
gone  through  a  course  of  education  as  to  the  pos- 
sibilities of  improvement  in  his  factory  that  has  al- 
ready saved  him  all  the  money  spent  on  the  system, 
but  has  had  opened  up  for  him  possibilities  of  the 
future  which  are  alluring  from  a  profit  viewpoint. 
But  from  the  mere  point  of  view  of  intelligent 
knowledge  of  the  situation  such  a  system  is  worth 
while. 

Let  us  see,  however,  how  the  trial  balance  and 
sub-statement  match  with  the  elements  of  the  phi- 
losophy of  costs  as  outlined  previously. 

They  furnish,  of  course,  the  proof  of  the  situa- 
tion. The  only  possible  error  lies  in  the  raw-ma- 
terial accounts.  The  amounts  used  may  not  have 
been  reported  properly,  in  which  case  the  trial-bal- 
ance showing  of  these  items  may  be  greater  or  less 
than  an  actual  inventory  will  show.  Fairly  fre- 
quent inventories,  during  the  year,  of  one  class  of 
raw  materials  at  a  time,  and  other  checks  discussed 
under  the  head  of  materials,  may  be  applied  until 
these  errors  are  remedied  and  avoided. 

The  imagination,  the  visualizing  of  shop  condi- 
tions, has  ample  opportunity  here.  The  whole  sit- 
uation of  the  plant  lies  plainly  bared — the  condition 
of  the  finances,  the  amount  of  money  tied  up  in  raw 
materials,  the  strength  and  weakness  of  the  differ- 
ent classes  of  work  from  the  profit  viewpoint.  In 
the  matter  of  Class  B,  for  example,  it  is  apparent 


48     COST  REPORTS  FOR  EXECUTIVES 

that  the  practical  instinct  has  ample  opportunity 
for  its  exercise  and  need  of  action. 

The  standards  must  be  furnished  by  the  execu- 
tive. They  will  quickly  occur  to  the  mind  of  the 
watchful  executive.  To  discuss  only  those  appli- 
cable to  manufacture,  the  following  will  appeal  as 
important: — a  standard  of  values  of  raw  material 
of  each  class  to  be  kept  on  hand  in  relation  to  the 
amount  of  business  done ;  the  amount  of  money  tied 
up  in  work  in  process;  the  proper  percentage  of 
profit  obtainable  in  each  class,  etc.  These  stand- 
ards fixed,  the  variation  of  the  actual  figures  from 
them  will  stir  the  executive  to  investigation  and 
action. 

As  to  the  element,  comparisons,  this  of  course  is 
the  life  of  the  trial  balance.  Each  month,  no  mat- 
ter how  pleasing  it  may  be  in  itself,  tells  of  pro- 
gress only  in  relation  to  the  others ;  and  in  the  sub- 
statement,  Form  2,  not  only  may  comparisons  of 
months  in  black  ink  be  had,  but  by  the  figures  in 
red  ink,  the  period  to  date  shows  the  average  pro- 
gress made  in  each  class. 

But  without  arrangement  all  these  values  would 
be  difficult  to  obtain.  Rapidly  the  executive  com- 
pares his  quick  assets  and  liabilities.  His  perma- 
nent assets  and  liabilities  tell  their  story  together. 
The  manufacturing  results  lie  stretched  out  before 
him.  The  sub-statement  is  a  concise  history  of  his 
classes  of  manufacture. 


TRIAL  BALANCE  AND  COST  SYSTEM    49 

As  to  periodicity,  the  trial  balance  must  be  pro- 
duced quickly,  and  generally  can  be,  within  a  week 
after  the  end  of  the  month. 

As  for  co-operation  of  the  organization,  that  ex- 
ecutive would  be  foolish  who  would  hide  the  con- 
dition of  Class  B,  as  shown  in  the  sub-statement, 
from  those  subordinates  who  could  help  remedy  it. 
Common  sense  demands  that  he  seek  their  co-opera- 
tion to  better  this  condition  if  possible. 

For  plant  control  and  operation,  while  of  course 
the  further  detail  is  essential,  nothing  could  be  more 
advantageous  than  this  trial  balance  as  an  indica- 
tion of  the  points  of  need  of  action. 

Many  executives  who  desire  such  a  showing  and 
do  not  possess  it  will  wonder  if  it  really  can  be 
produced  monthly.  There  rest  in  my  mind  the 
names  of  at  least  half  a  dozen  plants  where  it  exists 
in  successful  and  accurate  practice,  and  is  accom- 
plishing all  that  is  expected  of  it.  Of  course,  the 
forms  shown  may  be  varied  in  different  businesses, 
and  there  may  be  certain  other  items  of  enlighten- 
ment under  the  various  main  heads  that  may  seem 
desirable  to  add.  These  things  are  at  the  discretion 
of  the  executive. 

Such  a  trial  balance  is  always  an  easy  one  to  ob- 
tain in  all  concerns  where  the  work  is  done  on  order 
numbers  or  lot  numbers.  It  may  be  said,  however, 
that  it  does  occasionally  happen,  in  a  plant  produc- 
ing small  and  varied  staples,  and  in  which  the  labor 


50     COST  REPORTS  FOR  EXECUTIVES 

and  waste  situation  is  under  good  control,  so  that 
the  costs  of  articles  do  not  vary  very  much  as  to 
labor  and  material,  and  perpetual  inventories  are 
kept,  that  a  trial  balance  not  so  final  in  its  results 
may  be  satis  factory.  But  it  will  always  be  realized 
by  the  executive  with  the  grip  of  this  perfected  trial 
balance  on  his  business,  that  he  can  safely  have 
other  worries  in  life  than  those  of  his  business ;  and 
it  should  be,  to  those  who  do  not  possess  it,  a  proper 
ideal  of  attainment  in  their  businesses,  not  merely 
because  of  the  periodical  story  it  tells,  but  even 
more  because  of  the  struggle,  and  the  re-forming 
and  refining  process  their  plants  and  organizations 
must  go  through,  to  arrive  to  it. 


THE  COST  OF  THE  SALABLE  ARTICLE 


CHAPTER  III 

THE   COST   OF   THE  SALABLE   ARTICLE 

/^VNE  of  the  first  results  expected  of  a  cost  sys- 
^^  tern  is  that  it  shall  present  the  cost  of  the 
salable  article  as  a  basis  of  knowledge.  This  knowl- 
edge is  valuable,  not  necessarily  or  properly  only 
for  the  fixing  of  a  sale  price,  because  competition 
has  frequently  already  done  this,  but  for  the  pur- 
pose of  discovering  the  profit  or  loss  on  the  article 
as  manufactured  under  the  particular  conditions  of 
the  plant,  with  the  intent  on  the  part  of  the  able 
executive  of  altering  the  conditions,  or  the  quality, 
or  perhaps  even  the  method  of  sale,  where  the  sale 
price  cannot  be  changed,  if  the  facts  of  the  situa- 
tion demand  it. 

But  in  obtaining  this  cost  two  very  important 
modifications  must  be  borne  in  mind.  In  the  first 
place,  if  it  is  to  be  depended  upon  it  must  be  a 
proven  cost.  Its  total  added  to  the  totals  of  the 
cost  of  all  other  articles  produced  in  a  given  time 
must  equal  the  grand  total  of  all  expenditures 
whatsoever  of  the  plant  in  that  time. 

In  the  second  place  the  cost,  to  be  of  the  utmost 
value,  must  be  either  the  cost  of  the  article  pro- 
duced at  any  or  all  times,  or  must  be  compared  with 

53 


54     COST  REPORTS  FOR  EXECUTIVES 

the  costs  of  the  same  article  at  all  other  times  within 
a  reasonable  period. 

The  cases  of  absolute  business  failure  are  in- 
numerable where  figures,  presented  as  a  represen- 
tation of  cost,  are  accepted  without  proof  and  acted 
upon,  or  when  proved,  represent  only  special  effort ; 
and  even  such  cases  today  are  much  too  common. 
The  mariner  entering  an  uncharted  harbor,  judg- 
ing the  shoals  by  the  color  of  the  water  or  an  in- 
frequent sounding,  has  as  good  a  chance  of  reach- 
ing safe  anchorage  as  an  executive  using  costs 
without  these  modifications  has  of  properly  estab- 
lishing his  business  in  a  closely  competitive  field. 
It  is  purely  a  matter  of  luck. 

Many  cost  systems  fail  of  completeness  and  of 
proof  because  the  work  is  undertaken  from  the 
wrong  point  of  view.  The  costs  of  articles  are 
gathered  with  the  expectation  of  adding  them  to- 
gether to  equal  the  total  expenditure,  whereas  the 
simpler,  easier,  and  proper  method  is  to  divide 
completely  the  total  expenditures — in  their  three 
main  divisions  of  material,  labor,  and  expense — 
over  all  articles  in  the  course  of  production  peri- 
odically, that  period  generally  being  one  month. 
This  latter  method  starts  with  the  total  and  the 
proof,  and  works  out  into  the  detail.  It  involves 
first  of  all  that  there  be  arranged  methods  whereby 
the  total  used  of  each  main  division — material,  la- 
bor, and  expense — shall  be  completely  and  accur- 


COST    OF    THE    SALABLE    ARTICLE  55 

ately  gathered  and  proven  so  to  be.  Too  much 
stress  cannot  be  laid  upon  this  point  in  considering 
the  structure  of  a  cost  system.  The  further  di- 
vision of  these  totals  into  article  or  order  costs  is 
a  much  simpler  thing  to  accomplish,  for  the  first 
task  involves  co-operation  of  the  management,  gen- 
erally physical  re-arrangement,  and  some  persua- 
sion or  coercion  of  the  human  element,  while  the 
second  involves  merely  ingenuity  and  patient  train- 
ing of  the  human  element. 

The  building  of  a  cost  system  may  be  not  inaptly 
compared  to  the  building  of  a  house.  When  the 
three  main  divisions — the  cellar,  the  roofed  frame, 
and  the  walls  of  the  rooms — are  finished,  the  final 
completion  is  plainly  in  sight  and  ingenuity  and 
patience  will  complete  the  house. 

As  has  been  explained,  the  cost  of  an  article 
varies  at  different  times  of  manufacture,  sometimes 
quite  materially,  and  it  is  therefore  needless  to 
point  out  that  its  true  cost  is  not  what  it  is  pro- 
duced for  in  good  times,  in  bad  times,  or  the  first 
time,  but  what  it  can  be  produced  for  in  the  or- 
dinary average  routine  of  shop  practice.  Only  an 
accumulation  of  different  costs,  or  a  constant  rec- 
ord, or  at  least  the  record  of  all  variations  from  the 
standard,  will  give  a  surely  dependable  figure. 

.The  executive  is  first  interested  in  the  cost  of 
orders  as  they  are  shipped,  if  his  work  is  special 
and  done  on  order  numbers,  or  as  produced,  if  his 


56     COST  REPORTS  FOR  EXECUTIVES 

articles  are  staple  and  small  articles  produced  in 
large  quantities.  He  should  desire,  then,  as  a  part 
of  the  routine  of  his  work,  to  have  these  costs  placed 
before  him  regularly.  He  wants  them  concise, 
compared  with  a  standard  and  previous  duplica- 
tions of  the  same  article,  and  should  desire  detail 
presented  to  him  only  as  he  calls  for  it.  This  lat- 
ter is  essential  for  the  conservation  of  his  valuable 
time. 

Imagine,  then,  a  plant  operated  by  order  num- 
bers, i.  e.y  all  work  being  done  on  definite  orders, 
consequently  numbered.  As  these  orders  are  com- 
pleted the  manager,  should  he  have  a  right  cost 
system,  finds  on  his  desk  in  whatever  form  may 
seem  most  agreeable  to  him — cards  or  a  loose-leaf 
book — such  a  sheet  as  Form  3,  Executive's  Order 
Cost  Record. 

In  the  form  shown,  the  cost  is  of  a  large  unit; 
but  it  is  very  apparent  that  in  any  case  where  the 
work  is  done  on  an  order  number  the  size  or  quan- 
tity makes  no  difference  in  the  form  of  presenta- 
tion, and  it  is  equally  understandable  that  the  ex- 
ecutive may  have  whatever  divisions  of  material, 
labor,  and  expense  into  classes  he  may  desire. 
Common  sense  will  dictate,  however,  that  he  have 
presented  to  him  only  the  fewest  sub-divisions  of 
the  main  divisions  of  material,  labor  and  expense, 
so  as  to  observe  their  variations  from  the  standard 
and  as  between  different  orders,  and  when  these 


Article     NP      Class    B  Order  Nt 


Date 


Item 


1/11/12 

1/12 

1/13 


Material  XXX 

X 
XX 


Class    1 


1/13/12     Payroll 


1/16 
1/18 


1/19 
m 


1/20/12 

1/27/12 
1/31 
2/  3/12 


Material  XXXX 

"  XXX 

XX 

Y 

"  XXV 

XXX 

XXXX 


Payroll 
ii 

Material 
Payroll 


Oi 


5.52 


5.52 


Totals 


Tota 


NOTE.     This  form  supplies 
a  condensed  statement   of 
the  cost  of  all  like  orders 
or  articles,  on  separate 
sheets  or  cards,   in  com- 
parison with  estimate  or 
standard  where  possible, 
showing,   on  a  few  main 
divisions.  Material,  Direct 
Labor,   Factory  and  Selling 
Expense,   and  Total  Cost   in 
relation  to  selling  price, 
with  profit  or  loss.     Its 
object  is  to  point  out  to 
the  executive  quickly  the 
final  results,   with  enough 
detail  in  the  divisions  to 
show  in  what  division 
excess  cost,   if  any,   lies. 


Article 

NP  Class 

B 

FORM  3— EXECUTIVE'S  ORDER  COST  RECORD 

Date 

Order 
\[  MBEB 

Number 
Made 

Material 

Total 

Materiai 

Direct 
Labor 

Factokt 
Expense 

Selling 

Total 
Cost 

Selling 

Prick. 

Profit 

Loss 

Per  Cent. 
Profit 

o     La 

Rfmvrks 

Class    * 

CLASS 

Class   3 

Class    ^ 

Class  5 

11  12 

1  11  12 

2  21/12 

Std. 

56 

225 

1 
1 
2 

5.16 
5.52 

10.40 

37.24 
37.24 
74.48 

152.12 
171.18 

34.53 
38.19 

115.92 
134.97 
250.42 

344.97 
387.10 
732.02 

87.15 
102.90 
196.20 

96.12 
113.00 
215.82 

55.92 
56.02 

112.00 

584.16 
659.02 

650.00 
'<       650.00 

65.84 
43.96 

9.02 

10 

1.4 

Estimated  Standard 

320.34 

7S.38 

1,256.04  1,300.00 

3.4 

J 


1 NP      Class     B  ton  No.    5G 


FORM  4— DETAIL  ORDER— COST 

DiR]  ct  Labor 


NOTE. 

This  form  shows  the  cost 
of  the  salable  article  as 
the  cost  clerk  enters  it 
up  from  his  material  re- 
quisitions, payroll  or 
time  notes,  with  proper 
expense  added.  It  can  be 
made  to  show  material  in 
any  desirable  detail, 
labor  and  expense  by  de- 
partments or  divisions  arc 
likewise  by  dates, 
shows  start,  progr- 
completion  of  the  work. 
It  is  the  form  from  which 
Form  3,  Executive's  Order 
Cost  Pecord,  is  condensed. 


Selling 
Price 


Profit 


Loss 


NOTE. 

This  form  shows  the  cost 
of  the  salable  article  a 
the  cost  clerk  enters  it 
up  from  his  material  re- 
quisitions, payroll  or 
time  notes,  with  proper 
expense  added.  It  can  b 
made  to  show  material  in 
any  desirable  detail, 
labor  and  expense  by  de- 
partments or  divisions  a] 
likewise  by  dates,  and 
shows  start,  progress,  e 
completion  of  the  work. 
It  is  the  form  from  whic] 
Form  3,  Executive's  Orde 
Cost  Record,  is  condense 


650.00 


9.02 


COST    OF    THE    SALABLE    ARTICLE  57 

variations  attract  his  attention  to  the  point  where 
his  interest  or  the  needs  of  the  situation  demand 
further  detail,  he  can  then  refer  back  to  the  origin 
of  the  costs,  namely,  the  cost  sheets  of  the  book- 
keeper (for  this  method  of  cost  is  best  operated  as 
a  part  of  the  book-keeping  system)  shown  in 
Form  4. 

Here  is  shown  the  detail  of  order  cost  in  what- 
ever form  it  may  be  reported — the  material  from 
requisitions  or  stores  reports — the  labor  from  pay- 
roll or  time  notes — the  expense  from  the  expense 
analyses — all  to  be  illustrated  later.  Here  it  will 
be  observed  also  that  labor  and  expense  are  given 
by  departments.  It  is  almost  needless  to  point  out 
here  that  figures  and  letters  are  used  to  indicate 
classes,  departments,  and  items  of  material  which 
in  actual  practice  may  be  replaced  by  any  signifi- 
cant names  or  signs  that  the  circumstances  and 
clarity  of  the  situation  may  demand.  Nor  does  the 
question  whether  it  is  better  to  arrange  the  figures 
vertically  or  horizontally  need  any  answer.  It 
might  also  be  said  of  these  forms  that  they  are  pur- 
posely not  specific,  but  as  long  as  the  principles 
that  they  represent  (as  discussed  later)  are  adhered 
to,  no  difficulty  will  be  met,  although  they  repre- 
sent the  result  of  experience.  But  cost  clerks  are 
human  beings,  and  they  will  have  their  little  forms 
and  methods  which  the  executive  will  find  it  wise 
to  put  up  with,  as  long  as  he  loses  nothing  in  ac- 


58     COST  REPORTS  FOR  EXECUTIVES 

curacy,  clearness,  and  speed  of  presentation  of  the 
situation. 

Form  4  shows  the  detail  cost  of  the  order.  Form 
5  shows  the  cost  of  a  single  part.  The  relation  be- 
tween forms  3,  4  and  5  is  worth  noting.  Form  3 
is  the  condensation  of  Form  4,  this  latter  being  the 
method  of  gathering  or  picking  up  of  the  detailed 
costs  of  the  order  from  the  material  requisitions  and 
the  payroll  or  time-notes,  with  expense  added,  while 
Form  3  represents  the  totals  presented  to  the  ex- 
ecutive. But  both  Forms  3  and  4  represent  the 
total  order.  The  executive  may  frequently  want 
to  know  the  cost  of  parts  of  the  order.  Form  5 
represents  a  way  of  gathering  this.  And  right 
here  may  be  reiterated  an  important  point.  Many 
concerns  when  they  desire  to  get  the  cost  of  an 
order  or  article  attempt  to  get  the  cost  of  every 
separate  part,  add  these  together,  and  thus  get  the 
whole. 

While  this  is  on  occasion  a  practical  thing  to 
do,  it  is  most  frequently  simplest,  most  economi- 
cal, and  most  practical  (especially  where  the  trial 
balance  showing  the  monthly  profit  and  loss  is  to 
be  obtained),  to  operate  as  shown:  namely,  to  get 
the  cost  of  the  whole  order  or  lot,  condense  from 
that  to  the  executive's  order  cost  and  complete  trial 
balance,  and  then  analyze  from  it  the  cost  of  parts 
where  desired,  as  shown  in  Form  5.  By  this  means 
no  desired  detail  need  be  lost,  and  yet  the  success 


COST    OF    THE    SALABLE    ARTICLE  59 

and  values  of  the  final  showing  are  not  jeopardized 
by  frequently  overwhelming  detail. 

A  few  words  are  necessary  concerning  Form  6. 
Forms  3,  4  and  5  form  a  sequence  relating  to  one 
style  of  work  done  on  order  numbers  and  especially 
to  the  connection  with  Forms  1  and  2,  the  trial  bal- 
ance. 

Form  6,  however,  is  presented  for  the  situation 
of  small  staple  goods  where  the  detail  is  somewhat 
different  and  where,  dependent  on  the  control  of 
the  shop  methods,  the  cost  of  every  lot  may  or  may 
not  be  obtained.  It  is,  in  the  majority  of  cases, 
much  better  that  every  lot  should  have  its  cost  dis- 
covered, but  there  are  cases  where,  for  staple  ar- 
ticles constantly  repeated  in  manufacture,  definite 
measured  quantities  of  material  are  always  started 
through  the  factory,  and  where  the  labor  is  all 
piecework,  when  a  constant  and  careful  record  of 
waste  and  expense  fluctuation  will  give  the  absolute 
variation  from  the  standard,  and  in  these  cases  it  is 
frequently  sufficient  in  a  well-managed  shop  to  get 
the  cost  of  the  articles  periodically.  This  is,  how- 
ever, true  only  when  the  whole  shop  situation  is 
under  close  control,  and  should  be  generally  avoided 
for  best  results. 

How,  now,  does  our  philosophy  of  costs  apply 
to  Forms  3,  4,  5  and  6,  order  and  article  costs? 

The  practical  accuracy  of  these  figures  is  guar- 
anteed by  the  trial  balance  already  shown,  but  ma- 


60     COST  REPORTS  FOR  EXECUTIVES 

terial,  labor  and  expense  are  separately  handled 
and  proven  in  total,  as  will  be  seen  later.  They 
may  then  be  accepted  with  confidence. 

Imagination  to  visualize  the  actions  recorded  by 
the  figures  in  all  these  forms  is  absolutely  essential 
to  their  understanding.  It  is  necessary  to  the  ex- 
ecutive to  educate  and  to  strengthen  this  imagina- 
tion, or  to  bolster  it,  by  study  of  the  articles  manu- 
factured, and  to  familiarize  himself  with  shop  con- 
ditions. He  will  then  more  readily  understand  the 
meaning  of  the  differences  in  the  costs  of  different 
orders.  Without  imagination  the  differences  will 
be  recognized,  but  an  attempt  to  solve  them  leads 
to  much  investigation  and  lost  time.  This  value  to 
be  obtained  from  the  use  of  imagination  in  cost  in- 
terpretation cannot  be  too  seriously  considered, 
since  it  lies  at  the  root  of  the  whole  manufacturing 
situation;  first,  in  that  it  involves  on  the  part  of 
the  executive  a  thorough  intimacy  with  the  charac- 
ter, arrangement,  and  value  of  his  plant  units,  and, 
second,  in  that  it  lies  at  the  base  of  proper  cost 
understanding. 

In  the  remedy  of  these  differences,  practical  in- 
stinct comes  helpfully  into  action.  Imagination 
having  visualized  the  conditions  under  which  the 
orders  were  manufactured,  and  the  reason  of  the 
differences  being  known,  practical  instinct  suggests 
remedies  toward  more  closely  approaching  the 
standard. 


COST    OF    THE    SALABLE    ARTICLE  61 

The  standards  are  fixed  in  each  case  by  careful 
estimates  based  on  the  plans  of  the  work  and  the 
shop  conditions,  and  offer  a  silent  criticism  which  is 
healthy  in  its  urgence  of  standardization  of  shop 
methods  and  watchfulness. 

Essentially,  comparison  here  is  the  life  of  the 
system,  and  the  arrangement  of  Forms  3  and  6 
makes  it  quick.  Comparison  brings  out  especially 
the  wastes  of  material  (for  it  may  fairly  be  said 
that  any  material  use  over  right  estimate  is  a  waste) 
and  the  differences  in  labor  (which  latter  may  be 
and  generally  are  due  to  lack  of  control  of  this  ele- 
ment in  the  shop — more  often  than  they  are  due  to 
a  failure  to  estimate  properly). 

Besides  the  arrangement  in  Form  3,  which  offers 
to  the  executive  a  quick  glance  at  the  situation  on 
the  completion  of  each  order,  it  will  be  further 
noted  that  as  the  executive  desires  it,  Form  4  offers, 
at  his  call,  further  detail  of  each  order,  its  use  of 
material,  and  its  cost  occurrence  in  the  different  de- 
partments, and  as  desired  Form  5  offers  the  means 
of  getting  the  cost  of  any  part  of  the  whole.  This 
arrangement  makes  the  work  of  the  executive  easy 
and  effective. 

As  to  the  periodicity  of  time  of  presentation  of 
these  order  or  article  costs,  they  should  necessarily 
be  as  promptly  closed  and  presented  as  possible. 
Nevertheless  in  active  practice  it  is  generally  suffi- 
cient to  close  them  up  once  a  week  when  the  payroll 


62     COST  REPORTS  FOR  EXECUTIVES 

is  finished,  especially  on  articles  of  production 
under  good  control  in  manufacture.  The  new,  the 
losing,  or  the  doubtful  orders  should  have  their  cost 
brought  forward  as  soon  after  completion  as  pos- 
sible, before  the  memory  of  the  details  of  the  situa- 
tion becomes  obliterated. 

As  for  co-operation  of  the  executive  organiza- 
tion, how  can  any  executive  looking  at  Forms  3,  4, 
5  and  6  with  the  hope  and  expectation  of  changing 
them  for  the  better  even  have  the  courage  to  at- 
tempt it  without  the  co-operation  of  all  along  the 
line?  And  how  can  he  get  this  better  than  by  show- 
ing the  facts  to  them  as  presented  here?  It  is  true, 
however,  that  as  far  as  these  order  and  article  costs 
are  concerned  there  will  be  no  need  of  showing  to 
his  force  any  other  figures  except  the  material  and 
labor  costs,  since  the  expense  figures  are  not 
changeable  from  a  study  of  these  sheets  alone. 
Thus  the  executive  can  obtain  co-operation  in  a 
practical  way  without  presenting  the  final  facts, 
should  he  desire  not  to  do  so. 

In  this  matter  of  organization  co-operation  it 
has  often  proven  valuable  that  the  executive  should 
keep  his  sales  force  cognizant  of  the  cost  situation, 
since  it  is  too  often  the  tendency  of  a  salesman  to 
yield,  in  bidding,  to  the  pressure  of  competition  or 
those  exigencies  which  appeal  to  him  in  each  par- 
ticular case,  even  to  the  point  of  taking  orders  at  a 
loss  needlessly. 


Article   ST 
Item 

Standard  ] 
For   14000- 

Units 

Pric 

Material " 
B 

C 

806 
40 

$0 

.] 

.] 

.( 

8.S 

5 

D 
E 

800 
100 

Total  Material 

per   1C 

Cost  per  100 

Direct  Lauor 

Operation,  General 

1  in  Dept.    1 

2  2 

3  2 

|5.75 

.82 

.96 

1.25 

1.18 

4                        2 

5                        3 

6                        4 

Labor  Expense,  Total 

10.96 
1.14 

10.00 
78.62 

"              "  perl  00 

Selling  and  Adv. 

Total  Cost 
Cost  per    100 

8.15 

Number  Started 

000  \ 

Number  Finished 

965  V1 

in 

Per  Cent.  Waste 

3-1     ) 

Date  Finished 

Time  Allowed 

2  weeks 

19.65 
1.97 


NOTE  o 

arti  a 
simp'ni 


Pabt  SOT         Aeticle   NP  Class   B         Obdeh  No.  56A  No.  Made    10 

Material 


FORM  5— PART  COST 


Material  XXX 
1,  20  12      Payroll 


DlEECT  LaBOB 


Selling       Selling 
Expense 


29O0 


NOTE.  These  items 
entered  when  part  i|  sold 
separately. 


NOTE.  Form  5  is  precisely 
similar  in  action  to  Form 
4,  except  that  it  shows 
cost  of  any  part  or  parts 
of  the  order  of  which 
Form  4  show*  the  w!  I 
cost.   It  can  likewise  be 
made  to  show  any  detail 
desirable,  and  is  fr 
quently  used  to  show  cost 
on  parts  made  for  stock, 
for  repair,  or  other  pur- 
poses. 


Total  Cost  of    1069.65 
Each       6.97 


FORM  6— COST  OF  SMALL  STAPLE  ARTICLES 


Standabd  Estimate 
,000—8/14/12 


Mali  rial 


Total  Material 


Lubor  Expense,  Total 
" 

Selling  and  Adv. 
Total  Cost 


Units 

Pmok 

40 

5 

800 

.01 

2 
2 

2 

3 


Cost  per    100 


Niinil"  i  Start  'I 
Number  Finished 

PerCent.  Waste 
l);ile  Finished 
Time  Allowed 


.50 
8.00 


$8.43 


3.12 

3.75 
2.36 


Or deb    87 
For    10,000     1/8/12 

Units  PmcE  Amount 


8,060 

51 
8,000 


$161.20 
42.13 


Direct  Laboii 


$59.21 
8.65 


11.25 
12.50 
12.15 


| 

2/3/12 
4  weeks 

NOTE.  This  form  illustrates  a  method  of  showing  costs  of  small  staple  articles  made  in  lots,  or  of 
articles  where  the  materials  are  mixed  in  bulk  and  made  in  lots.  The  cost  shown  is  of  course  a  very 
simple  one,  but  illustrates  the  principle  and  method.   It  likewise  can  be  condensed  into  Form  3. 


t 


r  of 
very 
3. 


COST    OF    THE    SALABLE    ARTICLE  63 

The  values  to  be  gathered  from  order  costs  are 
many,  and  the  executive  who  studies  them  as 
planned  here  will  make  no  mistake,  for  their  intelli- 
gent study  is  the  gateway  that  leads  directly  to 
plant  improvement,  modern  methods,  and  shop  con- 
trol. The  effect  on  the  organization  and  even  on 
the  operatives  is  of  economic  value,  for,  presently, 
as  the  situation  is  brought  constantly  before  them 
by  particular  costs,  knowing  that  poor  results  will 
eventually  stare  them  in  the  face  in  cold  and  con- 
vincing figures,  they  begin  to  try  to  "make  the  fig- 
ures," a  process  which  can  be  successfully  carried 
out  only  under  the  right  cost  system  by  their  "mak- 
ing the  facts"  through  good  work.  As  a  matter  of 
fact,  good  order  costs  begin  after  awhile  to  react  on 
the  executive  himself  in  that  they  guide  his  actions, 
gauge  his  activities,  and  give  him  a  confidence  of 
judgment.  It  should  need  little  argument,  then, 
to  convince  the  executive  that  he  should  study  his 
costs,  for  eventually  their  study  leads  to  correc- 
tion, not  merely  of  the  particular  wrong  that  may 
have  led  to  some  high  order  or  article  cost,  but  of 
the  defect  or  arrangement  that  lies  at  the  base  of 
the  wrong,  so  as  to  thoroughly  eliminate  it.  It  is 
valuable  and  right  that  the  executive  should  be 
familiar  with  his  plant  and  see  its  operations  by 
personal  contact,  but  this  value  is  much  enhanced 
by  familiarity  with  his  costs,  just  as  understanding 
of  costs  is  enhanced  by  knowledge  of  the  plant. 


64     COST  REPORTS  FOR  EXECUTIVES 

This  method  of  order  costs  need  not  be  confined 
merely  to  salable  articles.  The  executive  at  his 
will  may  put  forth  orders  for  any  improvement  or 
shop  work  with  this  plan,  and  at  its  completion  get 
returned  to  him  its  true  cost. 

Here  is  presented,  then,  the  result  of  a  simple, 
easy,  workable  method,  the  possession  of  which,  in 
its  presentation  periodically  and  completely  of  the 
cost  of  all  salable  articles,  gives  to  the  intelligent 
and  active  executive  that  sure  and  confident  grip  on 
his  manufacturing  situation  which  must  keep  him 
moving  in  the  right  direction  constantly,  must  steer 
him  safely  away  from  those  mistakes  of  ignorance 
and  carelessness  which  are  great  profit  consumers, 
and  which  can  become  a  great  element  in  keeping 
his  organization  keyed  up  to  the  highest  manufac- 
turing pitch. 


THE  ECONOMIC  CONSIDERATION  OF 
MATERIAL  BY  COSTS 


CHAPTER  IV 

THE  ECONOMIC  CONSIDERATION  OF  MATERIAL 
BY  COSTS 

TT  may  be  well,  in  considering  material  as  the 
A  first  of  the  three  main  elements  of  cost,  to  de- 
fine what  it  means  from  the  cost  point  of  view. 
Material,  as  a  cost  term,  includes  only  that  which 
becomes  a  physical  part  of  the  finished  article. 
Any  other  material  necessary  in  the  course  of  manu- 
facture, which  does  not  become  a  part  of  the  fin- 
ished article  and  cannot  be  charged  to  it  as  an  in- 
tegral portion,  is  not  to  be  classed  as  material  from 
the  cost  point  of  view,  but  falls  under  the  head  of 
expense,  generally  as  a  supply. 

It  is  not  to  be  implied  by  this  explanation  that 
any  of  that  which  is  physically  material,  but  is  not 
so  considered  from  the  cost  point  of  view,  ought  to 
be  handled  in  manufacturing  practice  necessarily 
differently  or  with  less  care  and  consideration  than 
that  which  is  material  from  both  points  of  view,  but 
that  its  use  from  the  dollar  and  cents  point  of  view 
does  not  bear  the  same  relation  to  the  final  article 
cost.  Unconsciously  the  executive  handles  it  dif- 
ferently, even  when  he  has  no  cost  system  nor  any 
cost-system  understanding. 

67 


68     COST  REPORTS  FOR  EXECUTIVES 

Since  this  is  really  important  from  the  stand- 
point of  true  economy,  it  may  be  well  to  illustrate 
it  with  the  case  of  a  tool  manufacturer  who  manu- 
factures all  sorts  of  tools  to  make  the  work  of 
mechanics  easy  and  accurate,  and  in  his  advertise- 
ments advises  the  use  by  others.  Having  estab- 
lished his  designs,  he,  of  course,  furnishes  his  men 
ample  amounts  of  material  from  which  to  manu- 
facture them.  He  has  no  hesitation  in  doing  this 
because  he  figures  that  this  material  in  a  round- 
about way,  as  it  is  shaped  into  the  salable  article,  is 
being  converted  into  dollars  in  the  bank.  But  he 
fails  to  furnish  his  men  with  adequate  benches, 
modern  lighting  facilities,  up-to-date  tools  which 
he  may  not  manufacture.  These  latter  are  equally 
material  from  the  purchasing  agent's,  and  the  con- 
crete, point  of  view,  but  their  connection  with  the 
return  on  the  investment  is  not  so  direct  and  clear. 
One  class  of  material  gets  all  the  thought  and  at- 
tention that  the  kind  of  business  demands.  Its 
application  is  direct.  The  other  class  of  material 
gets  frequently  little  or  no  study  as  to  its  use  and 
value.    Its  application  is  indirect. 

Cost  consideration  makes  this  point  of  view  of 
directness  and  indirectness  the  dividing  line,  so 
that,  in  the  classification  of  material  as  the  first 
element  of  cost,  only  material  of  direct  application 
as  a  part  of  the  salable  article  becomes  a  matter  of 
interest,  all  other  material  receiving  attention  as  a 


COST    CONSIDERATION    OF    MATERIAL        60 

part  of  the  third  element  of  total  cost — that  is,  as 
a  part  of  expense. 

Now  material  is  the  simplest  of  the  cost  elements 
in  its  application,  and  yet  one  of  the  most  difficult 
and  expensive  to  gather  record  of  accurately. 

Its  simplicity  lies  in  the  very  fact  of  its  concrete- 
ness,  its  visible  use  in  manufacture,  and  the  direct- 
ness of  its  application  to  a  particular  finished  ar- 
ticle. It  is  always  before  the  eye  in  definite  form 
and  with  a  predetermined  and  distinct  destiny,  and 
can  be  measured  or  weighed  at  any  time. 

Its  difficulty  and  expense  lie  in  the  fact,  that,  de- 
spite this  concreteness  and  visibility,  it  requires  nu- 
merous and  sometimes  costly  safeguards  to  get  the 
quantities  used  and  remaining  on  hand  accurately 
recorded,  and  balancing  with  the  facts  of  the  case. 

In  this  respect  it  entirely  differs  from  the  two 
other  elements  of  cost,  labor  and  expense,  which 
lack  concreteness  and  constant  visibility,  but  can 
be  absolutely  accounted  for  to  a  penny  in  total  used 
weekly  and  monthly,  except  in  the  part  of  expense 
where  material  enters  as  a  supply. 

In  cost  keeping  there  can  be  very  little  quarrel 
as  to  how  to  apply  material  in  article  costs.  Re- 
ports of  weighed  and  measured  quantities  are  al- 
ways chargeable  directly  to  an  order  or  article. 
The  difficulty  in  devising  methods  to  make  sure 
that  a  correct  report  is  made  of  all  material  used, 
is  of  two  natures,  physical  and  human.    While  it 


70     COST  REPORTS  FOR  EXECUTIVES 

is  true  that  the  introduction  of  proper  methods  of 
receiving,  storing,  and  issuing  raw  materials,  and 
taking  care  of  finished  and  semi-finished  parts,  de- 
mands an  outlay  of  money  in  storerooms,  clerical 
attendance,  etc.,  it  can  be  safely  stated  that  such 
equipment  invariably  returns  full  value,  in  a  reas- 
onable time,  in  the  savings  made  through  minimum 
investment  in  supply  of  material  to  satisfy  the  de- 
mands of  manufacture,  because  of  certainty  of 
knowledge  of  supply  on  hand,  promptness  of  de- 
livery, and  saving  of  waste.  From  the  viewpoint 
of  getting  accurate  reports  of  material  for  costs,  of 
course,  such  an  equipment  is  invaluable.  It  will 
largely  solve  the  physical  difficulty  of  gathering 
costs  of  material  since  it  readily  permits  a  definite 
record  of  its  movements  and  disposal. 

The  human  difficulty  is  also  somewhat  avoided  by 
this  equipment,  but  not  entirely.  There  should  be 
in  every  well  conducted  plant  a  definite  watchful- 
ness of  the  question  of  wastes  of  material,  for  it  is 
here  that  the  human  difficulty  arises.  Operatives, 
through  carelessness,  accident,  or  of  natural  neces- 
sity, will  spoil  material,  and  in  many  cases  even  dis- 
pose of  the  waste  surreptitiously. 

There  are  three  factories  in  mind  where  discov- 
ery was  made  that  this  complete  loss  of  material 
amounted  to  many  thousands  of  dollars  a  year. 

It  must  be  remembered  that  the  material  cost  of 
an  article  is  not  obtained  by  dividing  the  total  cost 


COST    CONSIDERATION    OF    MATERIAL       71 

of  material  issued  on  the  order  by  the  number  of 
units  started  with,  but  by  the  number  of  units  fin- 
ished and  delivered,  which,  on  account  of  waste, 
most  often  yields  a  very  different  result,  and  this 
fact  necessitates  a  careful  record  of  the  progress  of 
material  and  the  wastes  made  during  its  progress. 
But  a  point  of  even  greater  value  here  is  that  all 
the  wastes  should  be  thoroughly  known,  so  that 
they  may  be  kept  to  a  minimum. 

Every  plant  has  enormous  wastes.  Some  of  these 
are  difficult  or  apparently  impossible  to  eliminate. 
Some  naturally  take  place  in  the  right  attempt  to 
reach  reasonable  and  high  standards  of  quality. 
Yet  all  should  be  carefully  watched  and  fought. 

The  waste  of  material  is  one  of  the  great  crimes 
of  the  ages.  We  suffer  from  this  fact  today,  and 
our  descendants  will  suffer  still  more.  We  eat  too 
much.  We  are  careless  in  the  use  and  preservation 
of  all  kinds  of  material. 

This  waste  is  one  of  the  largest  of  the  reasons  of 
the  high  cost  of  living.  And  there  seems  to  be  no 
great  movement  in  the  world  to  fight  this  waste, 
except  in  a  few  cases,  because  the  tendency  to 
waste  is  too  deeply  inbred,  and  because  we  have 
few  good  statistics,  or  standards,  as  yet  to  show  the 
volume  and  percentage  of  it.  But  every  good  ex- 
ecutive should  furnish  himself  with  the  statistics 
in  his  factory,  and  should  use  his  cost  system  to 
fight  this  tendency. 


72     COST  REPORTS  FOR  EXECUTIVES 

There  are  in  all  factories  several  kinds  of  waste. 
There  is,  of  course  most  prominently  that  which 
naturally  occurs  between  the  raw  material  and  the 
finished  article.  It  is  principally  of  four  different 
kinds  and  in  all  kinds  of  work  it  can  be  reduced  by 
very  careful  study. 

First,  the  design  may  be  altered,  for  it  is  true 
that  many  articles  are  manufactured  from  designs 
not  scientifically  worked  out.  In  making  this  al- 
teration, of  course,  it  would  be  folly  to  do  it  until 
after  all  questions  of  quality,  strength,  shape,  and 
durability  and  the  necessary  factors  of  safety,  had 
been  properly  considered.  This  waste  through 
wrong  design  cannot  be  shown  an  executive  by  any 
tables.  He  must  simply  recognize  the  necessities 
and  values  of  the  case  and  engage  the  proper  abil- 
ities, if  his  staff  does  not  include  them,  to  accom- 
plish this  economy.  It  is  of  course  as  false  an  econ- 
omy to  skimp  the  material  in  the  finished  article, 
and  thus  to  build  a  reputation  which  will  eventu- 
ally decrease  sales,  as  it  is  to  make  the  product 
too  heavy  by  a  guess  and  a  determination  to  be  on 
the  safe  side.  Frequently  experiment  may  be 
necessary  in  the  final  determination.  In  a  staple 
article  to  be  continuously  produced,  the  cost  of  the 
experiments  would  generally  be  small  in  compari- 
son with  the  value  of  results.  Where  this  waste 
occurs  it  involves  in  time  the  loss  of  a  very  large 
amount  of  monev  bv  its  constant  repetition. 


COST    CONSIDERATION    OF    MATERIAL       73 

A  second  form  of  waste  of  material  comes 
through  improper  purchasing,  natural  shrinkage, 
changes  in  design  at  inopportune  time,  leaving  on 
hand  specially  shaped  or  sized  material,  or  through 
those  errors  in  judgment  or  calculation  which  leave 
on  hand  useless  or  obsolete  material.  A  mistake 
that  the  executive  generally  makes  in  the  matter 
of  this  material  is  that  he  lets  it  lie  around  indefi- 
nitely in  the  hope  that  some  happy  day  may  dawn 
when  a  use  can  be  found  for  it.  It  is  generally, 
however,  the  wisest  thing  to  dispose  of  such  mate- 
rial at  least  loss,  and  to  charge  the  loss  to  general 
expense.  A  periodical  survey  of  the  list  of  mate- 
rial on  hand  will  discover  this  waste. 

A  third  and  principal  point  of  waste  occurrence 
lies  in  the  natural  reduction  of  the  original  raw 
material  in  its  progress  toward  the  finished  article. 
Many  executives,  considering  this  waste  natural, 
pay  little  attention  to  its  volume.  But  there  lies 
here,  as  observation  has  again  and  again  proven, 
large  opportunity  for  economy. 

A  fourth  method  of  waste  occurs  in  the  spoiling 
or  loss  of  units  of  production  in  progress,  through 
carelessness,  the  development  of  unexpected  de- 
fects, processes  gone  wrong,  or  by  the  many  diffi- 
culties that  beset  the  manufacturer  of  the  perfect 
article. 

It  is  a  simple  and  natural  corollary  of  a  right  cost 
system  that  proper  records  of  waste  should  be  gath- 


74     COST  REPORTS  FOR  EXECUTIVES 

ered  and  shown.  Forms  7,  8,  and  9  indicate  styles 
of  reports  that  every  executive  should  have  regu- 
larly laid  before  him. 

It  is  not  possible  to  make  a  standard  form  of 
waste  report  that  will  fit  every  business.  Each 
business  must  display  in  its  own  sequence  of  opera- 
tions where  wastes  occur.  In  a  business  like  the 
metal  trades  in  which  the  finished  article  comes  out 
of  a  purchased  shape,  or  from  a  commercial  form 
suited  to  its  production,  the  style  of  Form  7  may  be 
used  to  show  waste  in  progress  of  manufacture, 
but  it  may  be  varied  all  the  way  from  showing 
waste  only  between  raw  material  and  finished  ar- 
ticle, to  showing  it  at  each  operation,  or  by  depart- 
ments. 

In  a  business  where  the  materials  are  mixed  in 
mass  and  change  their  character  as  they  merge  to- 
gether, the  style  of  Form  8  may  be  used  for  the 
same  purpose,  and  again  with  such  variations  as 
from  raw  material  direct,  to  finished  article,  or  by 
departments,  or  operations. 

Form  9  illustrates  a  possible  method  of  waste 
record  of  spoiled  work  where  integral  parts  are 
started  with.  Form  8  may  be  elaborated  for  the 
same  purpose  where  the  production  is  in  mass. 
Such  analyses  if  followed  closely  will  always  de- 
velop large  economies.  But  it  must  be  understood 
that  it  is  generally  not  enough  to  know  merely  that 
there  is  a  definite  loss.    The  reasons  therefor  must 


Par 


Article 


Aa: 


Material 


.   V 

3 

w 

Total  Rough  Weight 

g 

Product  Department  1 

4 

2 

A 

4 

4 

4 

Total  Waste 

N(id  e 


Tl 


s    c 


^ 


FORM  7— WASTE  REPORT  FOR  UNIT  PARTS 


No. 


Rob.  Lb.   Fix.  Lb. 


Rgh.  Lb.   Fin.  Lb. 


No. 


Rgh.  Lb.   Fin.  Lb. 


100 

500 

1.000 

300 


250 
1,380 
2,600 
2,050 


200 
1,010 
2,002 
1,600 


370 
598 

450 


550 
1,203 
1.150 

560 


500 

1,005 

990 

502 


198 
160 


9     10 

12.1    1 
14      5 


NOTE.  This  form  indicates  a  record  of  waste  and  percentage  thereof  in  reducing  rough  articles 
by  work  to  the  finished  article,  and  this  waste  may  be  shown  after  each  operation  when  desirable. 
Compared  with  a  careful  standard,  this  record  will  show  many  opportunities  of  saving. 


r 


J 


FORM  8— WASTE  REPORT.     FOR  MATERIAL  IN  MASS 


Cf"t.     a»°':k™      W*8te       cl".      Amounts      Waste       ^ 


Totul  Rough  Weight 
Product  Department 


100 
100 


8,470 


300 

o 


NOTE.   This  form  shows  a  record  of  caste  inert  various  materials  are  mixed  in  mas 
This  record  shows  the  waste  and  percentage  in  separate  departments  or  operations. 


and  are  then  f  inishe  roduct 

omparison  with  a  standard  is  essential 


' 


ire  then  finished  to  a  final  product, 
omparison  with  a  standard  is  essential. 


COST    CONSIDERATION    OF    MATERIAL       75 

be  classified  and  studied  in  order  that  remedies  may- 
be had. 

These  forms  are  shown  merely  by  way  of  exam- 
ple. No  intelligent  and  economically  studious  ex- 
ecutive will  be  long  in  discovering  the  practical 
way  for  his  business.  By  the  practical  way  is  not 
meant,  however,  the  easiest  way,  but  the  way  that 
brings  out  best  where  the  wastes  occur. 

It  is  not  good  logic  to  argue,  as  do  some  exec- 
utives, that  it  is  needless  to  keep  track  of  the 
waste  where  it  is  of  no  value.  It  must  not  be  for- 
gotten that  waste,  valueless  as  such,  cost  money 
when  it  was  purchased  as  raw  material  and  would 
be  worth  money  if  not  wasted.  Records  thus  kept 
of  waste  will  eventually  permit  the  creation  of 
proper  standards  of  maximum  and  minimum  by 
which  to  work. 

It  may  not  be  inappropriate  to  point  out  here, 
that,  once  right  standards  are  fixed,  the  intense  co- 
operation of  operatives  may  be  obtained  in  reduc- 
ing actual  waste  to  them,  by  a  form  of  bonus,  just 
as  quantity  per  hour  is  increased.  The  method  has 
been  explained  in  an  article  in  The  Engineering 
Magazine  under  the  title  "Quality  Piecework." 

A  great  many  cases  of  waste  study,  and  mar- 
velous savings  therethrough,  might  be  given,  and 
they  would  undoubtedly  make  this  chapter  more  in- 
teresting; but  the  thinking  executive  will  generally 
have  no  difficulty  in  calling  to  mind  some  instances 


76     COST  REPORTS  FOR  EXECUTIVES 

in  his  own  experience,  and  even  a  slight  one  should 
urge  him  to  widen  this  experience  to  the  utmost, 
for  any  investigation  in  this  direction  always  pays 
large  dividends. 

It  is  often  necessary  in  the  study  of  waste  re- 
duction to  collect  the  waste  physically,  separately 
as  to  classes  or  articles,  as  well  as  to  possess  its 
statistics.  There  is  in  mind  one  plant,  making 
many  small  parts,  which  established  a  "bone-yard," 
where  weekly  are  displayed  all  spoiled  parts  with 
a  tag  showing  how,  where,  and  by  whom  spoiled, 
and  to  this  are  first  led  the  foremen  and  they  in 
turn  lead  the  culprits.  The  result  is  very  satisfac- 
tory. The  study  of  waste  is  a  vital  element  in 
factory  economy. 

Of  course  in  the  proper  gathering  of  material 
cost,  the  purchasing  department  plays  a  large 
part.  It  must  furnish  simple  but  complete  records 
of  raw-material  unit  prices.  Now  it  is  the  province 
of  a  purchasing  department  to  get  the  greatest 
value  for  the  least  money.  But  it  is  very  true  that 
the  cheapest  materials  per  unit  of  finished  product 
are  not  necessarily  the  cheapest  materials  per  unit 
of  raw  material.  The  purchasing  department, 
then,  should  keep  in  touch  with  the  waste  reports, 
because  from  them  it  may  well  discover  the  most 
economical  material  to  buy.  Of  course,  into  this 
consideration  also  comes  the  question  of  the  qual- 
ity of  the  finished  article. 


COST    CONSIDERATION    OF    MATERIAL       77 

Since  it  seems  not  to  be  a  very  well  known 
method,  though  a  very  simple  one,  of  connecting  the 
material  reports  with  the  book-keeping  accounts, 
as  well  as  with  the  order  costs,  Form  10,  a  material 
journal,  is  shown  here.  No  lengthy  explanation 
will  be  necessary.  As  is  apparent,  the  material,  as 
reported,  is  credited  to  its  proper  raw-material  ac- 
count, and  debited  to  the  class  of  work  in  which 
it  is  used  under  the  head  of  "Cost  of  Work  in  Proc- 
ess." The  order  number  is  shown,  so  that  for  order 
costs,  perpetual  inventory  of  raw  materials,  and 
book-keeping  purposes  leading  to  the  complete 
trial  balance,  this  material  journal  is  effective. 

In  the  perpetual  inventories  of  material  in  dol- 
lars and  cents  which  appear  under  the  head  of 
"Raw  Materials  on  Hand"  in  the  trial  balance,  lie 
the  crucial  tests  for  accuracy  of  the  whole  cost 
system,  for,  as  will  be  seen  later,  the  other  ele- 
ments of  cost,  labor  and  expense,  are  readily 
proven  weekly  and  monthly  as  to  their  accuracy 
in  the  total  cost. 

It  will  be  observed  that  these  figures  of  Raw 
Material  on  Hand  are  obtained  by  starting  with 
an  actual  inventory,  adding  monthly  purchases, 
and  deducting  monthly  the  amount  of  material  re- 
ported used.  Making  the  fair  assumption  that  the 
inventory  to  start  with  has  been  taken  carefully 
and  accurately,  it  will  be  recognized  that  the  only 
source  of  error  lies  in  the  reports  of  used  material. 


78     COST  REPORTS  FOR  EXECUTIVES 

Now  despite  all  precautions,  it  is  with  difficulty 
that  the  dollars  and  cents  total  of  material  used 
monthly  is  accurately  obtained.  Carelessness  in 
measure  and  weight,  surreptitious  extraction  of 
material  to  replace  spoiled  work,  occasional  theft, 
unavoidable  wastes  by  shrinkage,  etc.,  changing 
prices  on  different  lots  of  the  same  material,  make 
this  task  one  of  difficulty  to  which  the  executive 
should  give  some  attention.  He  will  in  the  end  be 
able  to  remedy  them. 

Of  course  proper  means  of  storing  and  issuing 
materials  present  the  greatest  remedy.  Checks  by 
careful  observation  of  the  costs,  and  at  the  end  of 
different  lots  as  to  balancing  of  amount  purchased 
and  amount  reported  used,  will  show  other  delin- 
quencies. The  addition  of  definite  percentages 
based  on  careful  experience  and  observation  will 
correct  many  shortages  due  to  material  shrinkages, 
for  it  is  well  known  that  many  substances,  such  as 
coke  for  example,  will  weigh  into  a  car  an  ap- 
preciable percent  heavier  than  they  will  weigh  out. 

To  help  such  a  situation  out,  materials  should 
be  arranged  and  kept  track  of  in  the  book-keeping 
by  classes,  and  if  narrowed  down  to  reasonably 
small  ones,  as  experience  dictates,  actual  invento- 
ries and  checks  as  particular  lots  disappear,  will 
in  time  bring  accuracy  of  stock  actually  on  hand 
with  book  values,  so  that  the  latter  may  be  de- 
pended upon,  and  total  accuracy  assured. 


COST    CONSIDERATION    OF    MATERIAL       79 

And  this  is  very  definitely  a  matter  in  which  the 
executive  should  interest  himself,  because  it  in- 
volves definite  losses  through  wastes,  and  its  proper 
solution  invariably  leads  to  larger  profit. 

The  application  of  our  philosophy  of  costs  will 
not  at  first  seem  so  plain  in  relation  to  this  subject 
of  material,  yet  it  is  extremely  important. 

In  accuracy,  material  cost  should  be  absolute  be- 
cause of  its  direct  application.  Nevertheless  there 
arise  many  cases,  as  indicated,  where  in  practice 
this  does  not  prove  to  be  true,  and  we  are  here 
forced  back  upon  practical  accuracy  or  accuracy 
of  total  cost.  For  when  material  is  discovered  to 
have  disappeared  with  no  knowledge  as  to  what 
order  or  article  it  is  chargeable  to,  or  to  have  be- 
come obsolete,  then  we  must  fall  back  in  actual 
practice  upon  some  practical,  even  if  not  theoretic- 
ally right,  way  of  getting  it  into  costs,  such  as  add- 
ing it  as  a  percent  to  the  material  costs  of  those  ar- 
ticles which  use  the  disappearing  material,  or  put- 
ting it  into  expense,  where  it  will  be  divided  over 
total  production,  as  circumstances  may  dictate. 

There  are  those  who  advise  that  the  cost  of  work 
spoiled  in  process  should  be  a  charge,  not  against 
the  particular  order  or  article,  but  against  the  to- 
tal work  through  additions  to  expense;  but  this  is 
a  very  arguable  matter,  and  it  would  seem  that 
more  is  to  be  gained  in  the  long  run  by  letting 
each  class  of  work  stand  for  its  own  misfortune. 


80     COST  REPORTS  FOR  EXECUTIVES 

Imagination  to  visualize  the  facts  of  use  and 
waste  of  material  from  the  figures,  and  practical 
instinct  to  detect  the  weakness  and  the  remedy  are 
of  course  essential. 

In  fact,  imagination  in  the  consideration  of  ma- 
terial helps  to  simplify  and  beautify  the  whole 
manufacturing  proposition.  It  can  lure  up  the 
picture  of  the  raw  material,  its  course  through  the 
cohort  of  workers,  changing  its  shape  and  form, 
sloughing  its  natural  wastes  as  it  is  touched  into 
a  thing  of  use  and  profit,  while  practical  instinct 
follows  it  to  see  that  the  purchase  is  of  best  qual- 
ity and  price,  and  that  it  progresses  with  minimum 
waste  and  effort.  It  can  bring  forward  constantly 
the  sad  consideration  that  since  raw  material  in 
most  factories  is  merely  the  finished  product  of 
previous  labor,  its  waste  is  not  merely  the  waste 
of  the  material  itself,  but  the  setting  at  nought  of 
the  earnest  work  of  many  hands  that  have  brought 
it  thus  far  on  its  way  to  final  usefulness.  The  cost 
figures  furnish  ample  basis  with  right  standards, 
for  the  practical  exercise  of  these  elements  of  the 
philosophy  of  cost. 

Standards,  especially  of  waste,  and  of  stock  on 
hand,  are,  in  the  matter  of  material,  peculiarly 
valuable  and  necessary.  Waste  of  material  in  fac- 
tories is  so  large,  so  usual,  and  so  essential,  that, 
without  carefully  worked  out  and  insisted  upon 
standards,  all  concerned  are  liable  either  to  become 


rNii 

Ope 


Work  in 


D 


C   1 


5.521 


49.20 


49.20 


3.18  5,52 


NOTE.  Material  classounts 
Work  in  Process  accoumateri; 
weekly  from  material  1  tran 


Part      n  6. 


FORM  9— SPOILED  WORK— FOR  UNIT  PARTS 


Number    0pEBiIION     m^     Machine      Spoiled        N™B„EE 
Started  Itood 


Operation     Man     Machine      Spoiled 


Operation     Man     Machine      Spoiled 


Number 


Operation     Man     Machine      Spoiled 


103 
207 


100 

500 

100 

1,000 


98 
495 


NOTE.  This  record  shows  waste  by  spoiling  of  parts,  and  is  especially 
applicable  to  small  parts,  as  they  pass  from  one  operation  to  another. 
Here  the  men,  machine,  and  operation  are  shown. 


( 


m 


FORM   10— MATERIAL  JOURNAL 


Work  in  Pbocess — Classes 


Raw  Matebials  on  Hand 


NOTE.     Matei.  ihe  rough  as  god  to  Manufacturing  or 

Work  In  Proe  i  3  A,    B,    C,   D,    etc.  .    at  the  sam»-  ■.  on  what  order  mini  .  ;  or 

weekly  from  m.'  ,   offers  a  complete   record  for 


^ 


Raw  Materials  on  Hani 

2                   3 

4                 5 

J 

92.18 

1 

27.00 

28.12 

3.18 

49.20 

30.18 

92.18 

— i — 
28.12 

49.20 

is  used,  and  charged  to  Manufacturing  or  Cost  of 
il  was  used.   This  record,  written  up  daily  or 
sf  er  values  in  cost  records  and  bookkeeping. 


COST    CONSIDERATION    OF    MATERIAL       81 

satisfied  and  indifferent,  classing  the  waste  made, 
whatever  it  may  be,  as  a  necessary  corollary  of 
manufacture,  or,  if  the  manufacturing  conscience 
of  the  executive  be  tender  and  his  horror  of  waste 
great,  the  attempt  to  reach  an  impractical  mini- 
mum becomes  more  expensive  than  the  waste. 

No  one  will  dispute  the  necessity  of  comparison. 
Progress  in  any  direction  fails  to  show  without  it. 

With  such  a  mass  of  figures  as  the  question  of 
material  and  waste  presents  in  factories,  where  at- 
tempt is  made  to  follow  waste  carefully,  most  value 
is  lost  without  proper  arrangement,  for  the  weak- 
ness must  be  quickly  seen. 

Periodicity  becomes  vital  in  its  necessity  for 
promptness.  Wastes  should  be  known  and  pre- 
sented as  soon  as  possible  after  their  occurrence. 
Where  the  work  is  large  a  daily  report  is  advisable. 
Where  articles  are  small,  or  the  product  is  in  mass, 
the  knowledge  can  generally  and  most  practically 
be  known  as  the  lot  passes  completely  each  oper- 
ation. 

There  is  no  element  more  vitally  valuable  than 
co-operation  of  the  organization  in  the  matter  of 
care  of  material,  and  consideration  and  watchful- 
ness of  waste.  There  is  no  reason  why  such  rec- 
ords should  not  be  open  to  everyone  concerned, 
and  indeed  great  attention  should  be  paid  to  im- 
pressing these  figures  upon  them.  Everyone  con- 
cerned in  manufacture  works  better  with  a  goal, 


82     COST  REPORTS  FOR  EXECUTIVES 

an  aim,  a  standard  toward  which  he  may  and  must 
continually  strive. 

To  recapitulate  then,  the  cost  consideration  of 
material  leads  to  economies  through: 

The  proper  purchase  of  material. 

The  proper  care  and  issue  of  material,  and  stud- 
ied corrections  at  points  where  errors  are  liable  to 
occur. 

Scientific  design  of  product. 

Care  that  material  shall  not  become  obsolete. 

Watchfulness  of  waste  of  material  between  raw 
material  and  finished  product. 

Watchfulness  of  waste  made  by  spoiling  units  of 
production. 

Much  attention  has  been  given,  in  discussions  of 
economies  of  management,  to  the  elements  of  la- 
bor. A  proper  conception  of  the  element  of  ma- 
terial, however,  as  the  basis  of  all  labor,  as  the 
element,  springing  only  from  natural  sources, 
which  labor  shapes  into  forms  of  use  and  beauty, 
the  cheapness  and  plentifulness  of  which  make  for 
the  happiness  of  the  whole,  and  the  waste  of  which 
is  to  abuse  instead  of  to  bless  nature's  bounty  and 
the  work  of  our  fellowman — if  this  conception 
could  be  universally  held  up,  highest  speed  of  pro- 
duction and  maximum  prevention  of  waste  would 
not  be  ideals  still  so  far  from  accomplishment.  But 


COST    CONSIDERATION    OF    MATERIAL       83 

taking  the  situation  as  it  is,  the  intelligent  execu- 
tive will  supply  himself  with  the  best  safeguards 
in  the  handling  of  his  materials,  and,  with  set  stand- 
ards, use  his  material  costs  and  records  of  wastes, 
proven  and  in  ample  detail,  to  keep  himself  and 
his  organization  working  steadily  toward  the  best 
results. 


LABOR  FROM  THE  COST  VIEWPOINT 


CHAPTER  V 

LABOR  FROM  THE  COST  VIEWPOINT 

ONE  of  the  complaints  of  labor  is  that  it  is 
viewed  too  much  purely  from  the  cost  point 
of  view,  yet  this  is  one  of  the  natural  outcomes  of 
the  struggle  for  economy  and  efficiency. 

Material,  the  first  element  of  cost,  is  an  inani- 
mate thing,  subject  in  its  use  to  the  intelligence 
and  carefulness  of  labor. 

Expense,  the  third  element  of  cost,  is  built  up 
around  labor  for  the  purpose  of  assisting  its  ef- 
fectiveness, and  guiding  it. 

Labor  is  therefore  central  in  the  trio  of  cost  ele- 
ments. It  is  an  element  of  anxiety  to  the  execu- 
tive, in  that  it  is  the  only  element  of  cost  whose 
movement,  whose  effectiveness,  whose  control,  does 
not  seem  to  be  readily  under  his  will. 

But  what  makes  it  of  the  largest  interest  to  the 
executive  is  that  it  is  the  most  elastic  of  the  three 
elements  of  cost,  and  the  one  whose  control  per- 
mits the  greatest  economies,  increase  of  volume, 
and  steadiness  of  operation.  For  this  reason  most 
of  the  discussed  methods  of  management  centre 
around  labor.  But  equally  for  the  same  reason  it 
is  important  that  the  executive  have  definite  and 

87 


88     COST  REPORTS  FOR  EXECUTIVES 

close  information  from  his  cost  system  concern- 
ing it. 

For  cost  purposes,  labor  divides  itself  into  two 
parts:  direct  labor,  or  that  which  can  be  shown 
to  have  a  direct  relation  to  a  particular  article  of 
production,  and  indirect  labor,  that  which  is  gen- 
eral to  the  whole  production.  This  latter  becomes, 
through  its  indirectness,  an  element  of  expense, 
and  ceases  to  be  considered  as  an  element  of  cost 
under  the  caption  of  labor ;  although,  of  course,  in 
the  question  of  economy,  it  deserves  (although  it 
seldom  receives)  as  much  attention  as  direct  labor. 

Labor  is  the  simplest  of  the  cost  elements  in  its 
application  and  proof  as  to  the  total  costs.  It  may 
be  somewhat  difficult  in  certain  classes  of  work  to 
get  the  time  of  operatives  exactly  apportioned  to 
the  different  articles  of  manufacture,  but  it  is  not 
difficult  to  divide  all  labor,  weekly,  between  direct 
and  indirect,  and  to  divide  all  the  direct  labor  over 
the  total  production. 

The  difficulties  of  obtaining  a  proper  apportion- 
ment of  direct  labor  to  units  of  production  are  al- 
most entirely  human,  however.  There  is  a  some- 
what natural  hesitation  or  antipathy  on  the  part 
of  operatives  to  having  their  time  on  different  oper- 
ations exactly  measured,  because  of  the  fact  that 
the  information  will  be  used  in  criticism  of  them. 
The  inevitability  of  necessity  eventually  takes  care 
of  this  difficulty. 


LABOR    FROM    THE    COST    VIEWPOINT        89 

There  is  considerable  hesitation  on  the  part  of 
the  executive  to  supply  either  apparatus  or  cleri- 
cal labor  sufficient  to  get  the  facts  of  labor  opera- 
tion, until  he  has  learned  from  experience  that, 
when  the  facts  are  obtained  and  properly  utilized, 
the  expenditure  is  fully  warranted. 

There  is  finally  the  opposition  of  the  foremen 
to  having  their  departments  (to  use  their  own 
phrase)  "turned  into  book-keeping  departments." 
This  opposition,  however,  can  be  quickly  banished 
by  education,  and  the  application  of  that  element 
of  cost  philosophy,  co-operation,  will  readily  turn 
it  into  enthusiasm  for  the  record  in  the  case  of  any 
good  foreman. 

It  will  do  no  harm  to  repeat  here  that  the  best 
way  to  gather  the  facts  of  any  complete  costs  is 
to  start  with  the  total,  and  analyze  to  such  details 
as  are  desirable,  and  not  to  gather  minute  details 
with  the  idea  of  adding  them  together  to  a  proved 
whole. 

In  the  getting  of  labor  costs,  therefore,  the 
weekly  payroll  may  be  taken  as  the  proved  whole 
and  analysis  therefrom  will  give  any  details  de- 
sirable. The  payroll  can  be  made  to  tell  a  good 
deal  more  about  labor  than  it  usually  does.  Ordi- 
narily it  is  used  merely  for  the  purpose  of  paying 
wages  periodically.  But  important  uses  can  be 
made  of  it,  both  from  the  point  of  view  of  the  ex- 
ecutive, and  of  the  cost  clerk  and  book-keeper. 


90  COST    REPORTS    FOR    EXECUTIVES 

Form  11  indicates  a  method  of  payroll  which 
offers  many  advantages,  especially  for  a  plant  do- 
ing its  work  on  order  numbers,  or  in  lots.  As  is 
apparent  from  a  perusal  of  this  form,  the  whole 
story  of  each  department  is  told — the  workmen, 
their  numbers,  their  rates,  what  they  received,  any 
deductions,  what  they  earned,  whether  their  work 
was  indirect  or  direct,  if  direct,  on  what  jobs,  how 
many  hours  worked  on  each  job,  and  what  was  the 
cost.  This  is  almost  the  whole  story,  and  a  con- 
tinuous record  made  from  week  to  week  offers  the 
executive  ample  opportunity  to  consider  the  situ- 
ation in  any  department,  to  consider  the  relation 
between  direct  and  indirect  labor,  to  know  just 
who  worked  on  a  given  job  and  for  how  long.  It 
offers  the  executive  the  opportunity  of  a  further 
analysis  of  his  labor,  when  the  labor  costs  as  shown 
in  Executive's  Order  Cost,  Form  3  and  the  costs  in 
Form  4,  are  not  satisfactory  or  in  sufficient  detail 
to  tell  the  story,  just  as  Form  10  offers  the  op- 
portunity to  get  a  further  analysis  of  material.  It 
offers  what  every  cost  record  should  offer,  a  pic- 
ture of  the  situation. 

But  this  payroll  offers  also  to  the  cost  clerk  and 
book-keeper  ample  information.  The  payroll  of 
course  proves  the  labor  cost  as  charged  to  all  orders 
each  week.  Its  weekly  totals  can  be  used  for  cost- 
sheet  and  book-keeping  entries,  and,  as  shown  at 
the  bottom  of  the  form,  they  can  likewise  be  used 


PA-V 

Houi 

55 
55 
55 


20G 


amc 
labc 

omes 


Article    XL 

OrEIlAT 

Date           Machine 

Worker 

Number          Nun- 
Started           Fini 

* 

2/12/12 

23 

13 

100 

2/13 
2/14 

100 
100 

c 
c3 

2/15 
2/17 

100 
100 

3 
IC 

3   da 

Tob   don 

NOTE.  '"  the 
machinen  pi 
incenti 


FORM  1 1— WEEKLY  PAY  ROLL 

V_ 

Date 

Indibect 

Direct 

Order 

Order  59 

Order                         Order    72 

Name 

No. 

Houa  Rate          Paid 

Deduc- 
tions 

Remarks 

Total 
Earned 

Hours        .. 
...                  Horns 
Worked 

Amount 

Hours     Amount 

Hours 

Amount     Hours 

Amount 

Hours 

Amount 

Hours 

B.  Johnson 
J.  Smith 
F.  Brown 
L.  Burns 

3 

3.50  day 
.20 

19.00 

2.00 

Stock  Purchase 

21.00 

6  day;; 

11.00 
8.25 

13.50 

11.00 

11.00 
8.75 

.50 

8.75 

55 

3.00 

Pure] 

15 

16.50 

55 

7.50 
6.63 

inson 

7.50 

Etc. 

Etc. 

Etc. 

Etc. 

Totals 

Gen.  Expense  added                                                        15c    per  hour 

J  12.00  | 

Dept.  Expense  added                                                                per  hour 

be   idded  when  desired  on  percentage  direct  labor  to  expense     Percentage  indirect  to  direct  labor  =14.7 

NOTE.      Th;                            method  of  keeping  the  payroll,   which  not  only  shows  amount  to  be  paid  each  man,   tut  shows  division  between  direct 

Indirect   labor,   percentage                             labor,   and  division  of  direct  labor  to  or                             proof  of  the  whole.     By  the  addition 
of  expense  at  the  bottom  of  the  sheet  to  each  order,    this  payroll                                                     >f   entry  for  bookkeeping                            oing 
purposes.     By  loose-leaf  methods  and  department  iaing,   it  is                                                       re  are  200   or  300  orders  worked  on  in  one  week.                                      f 

) 


FORM  12— COST  OF  LABOR  OPERATIONS 


2/12/12 

2/13 

2/14 

2/15 

2/17 


100 
100 
100 
100 
100 


np  day  wo) 


li  ite 
per 
How 

(or  i" 

3UC 

18.4 

2/13 
2/14 
2/19 
2/19 
2/19 


\].:rl,    :,, 

18 

Worker 

Started 

Number 
Finished 

Cost 
[01     1" 

E.irncd 
per  Hour 

31 

15 

93 

93 

3 

le 

21 

16 

96 
92 
98 
100 

96 

92 

3 

32 
36.8 

2i 

98 
100 

35.6 
40 

; 

3b  done 

piece 

■ork 

' 


2/14 
2/15 
2/19 
2/19 
2/20 


llll'^J?15^^   tl0e  and11cost  °f  l3b°r  operations  comparatively,  and  the  earning  power  of  the  men  and  value  of  the 
machines.  It  shows,  as  well,  number  of  parts  spoiled  in  each  operation, 
incentive  plan,  may  be  shown  in  red  to  distinguish  them. 


Operations  done  on  piece  work,  or  under  any 


Started 

93 

90 

5 

per 

Cost 
for  10 

30c 

96 

92 

98 

100 

96 
92 
95 

98 

6 
51 

25c 

Job   do; 

e   day 

ork 

^ 


Operation   3 


Date 

Machine    \\  orker 

Number          Number    ,„. 
Started           Finished    iime 

Rate 

per 

Hour 

Cost 
for  10          ] 

2/14 

92;       27 

93                90 

5 

30c 

165 

2/15 

96                96 

434 

14.8 

2/19 

92               92 

4^ 

15.3 

2/19 
2/20 

94 

9 

98 
100 

95 
98 

6 
5i 

25c 

15.8 
14 

Job   doi 

le   day 

arork 

3  men  and  value  of  the 
ece  work,  or  under  any 


LABOR    FROM    THE    COST    VIEWPOINT       91 

as  the  bases  for  adding  expense  to  orders,  which 
items  can  then  be  entered  in  costs  and  book-keep- 
ing at  the  same  time  labor  is  entered.  When  de- 
partmentized,  such  a  payroll,  even  in  a  large  plant, 
offers  practically  no  clerical  difficulties,  but  it  does 
offer  a  proved  and  complete  record  and  a  history, 
by  order  numbers,  of  each  man's  work — the  time 
notes  being  the  next  and  final  step  that  can  be 
taken  in  this  analysis  of  labor. 

It  does  not,  however,  offer  to  the  executive  what 
he  must  have  in  his  effort  to  control  labor  cost — 
a  detailed  criticism  of  operation  time  and  cost. 
For  it  goes  without  saying  that  the  only  manner  in 
which  labor  can  be  effectively  brought  to  its  best 
economic  state  is  through  the  study  and  control  of 
its  least  and  simplest  operations. 

Form  12,  however,  offers  a  simple  and  effective 
means  of  information  on  these  points,  and  just  as 
the  payroll  pictures  the  situation  as  a  whole,  this 
record  pictures  the  intimate  detail  of  each  man's 
work. 

Here  are  seen  the  date,  the  man,  the  machine, 
the  article  worked  on,  the  operation,  the  time  and 
the  cost,  in  comparison  with  the  standard  and 
other  records.  Here  can  plainly  be  observed  de- 
lays, good  records,  the  results  of  proper  pre-ar- 
rangement,  the  values  obtained  by  incentives,  the 
variations  of  men  and  machines.  Also,  when  the 
work  is  paid  on  some  of  the  incentive  methods,  the 


92  COST    REPORTS    FOR    EXECUTIVES 

earning  power  of  the  man  on  the  operation  is 
shown. 

In  the  plant  operated  under  ordinary  methods 
these  records  are  ample,  and,  for  purely  cost  pur- 
poses, complete.  With  slight  variations  they  may 
be  made  to  show  the  facts  of  the  case  plainly  un- 
der any  method  of  labor  payment. 

The  operation  of  our  philosophy  of  costs  is  not 
difficult  to  construe  in  respect  to  these  labor  rec- 
ords, but  a  slight  recapitulation  will  show  its  ex- 
treme importance  if  the  executive  expects  to  get 
results  from  his  labor  costs. 

In  these  records  practical  accuracy  is  of  course 
assured,  since  each  week,  more  particularly  in  the 
payroll  Form  11,  a  complete  division  of  all  labor 
paid  for  is  made  to  indirect  labor  as  an  expense 
item,  or  to  some  order  number. 

Imagination  and  practical  instinct,  which  in 
service  go  hand  in  hand,  play  a  large  and  efficient 
part  in  considering  these  records.  This  is  neces- 
sarily so  on  account  of  the  elasticity  of  this  ele- 
ment, labor.  Without  imagination  to  visualize  the 
events  and  conditions  pictured  by  the  figures,  to 
gauge  the  element  of  human  nature  and  effects 
upon  it  and  actions  prompted  by  it,  and  without 
practical  instinct  working  to  conclusions  from  this 
conception,  labor  costs,  offering  such  large  results 
from  their  study,  are  somewhat  useless  from  the 
point  of  view  of  shop  control;  and  it  must  not  be 


LABOR    FROM    THE    COST    VIEWPOINT        93 

forgotten  that  costs  are  more  important  from  the 
point  of  shop  control  than  from  that  of  price  fix- 
ing. 

But  with  these  elements,  which  are  really  the  at- 
tributes of  a  good  administrator,  in  active  opera- 
tion, such  a  record  as  Form  12  will  unquestionably 
force  the  executive  to  institute  some  of  the  modern 
methods  of  incentive  to  labor,  in  order  not  only  to 
reduce  but  to  make  steady  the  labor  costs  and  to 
bring  about  their  approximation  to  the  standard. 

In  the  matter  of  standards,  of  course,  scientific 
management  has  made  clear  how  these  may  be  set 
with  motion  and  times  studies,  and  it  is  inconceiv- 
able when  the  possibilities  and  elasticity  of  labor 
are  realized  that  any  other  standards  than  these, 
worked  out  with  a  close  and  careful  study  of  all 
conditions  and  necessities,  should  be  considered. 
But  it  must  not  be  overlooked  that  it  is  futile  to 
work  the  standard  out  on  one  basis  and  attempt  to 
do  the  work  under  other  conditions,  if  it  is  expected 
or  desired  to  attain  the  standards. 

Without  comparisons,  of  course,  Form  12  be- 
comes useless.  There  is  always  in  a  factory  of  any 
size  such  a  multiplicity  of  labor  operations,  orders, 
and  labor  cost  units,  that  without  simple  arrange- 
ment, the  facts  of  the  case  (for  any  purpose  of 
economy  or  control )  become  no  better  than  a  series 
of  figures  mixed  in  a  lottery  wheel.  Arrangement 
is  the  very  life  of  their  use.     The  executive  must 


94     COST  REPORTS  FOR  EXECUTIVES 

be  compelled  to  scan  detail  only  as  it  seems  desir- 
able. 

In  any  duplication  of  work  prompt  periodicity 
is  essential,  but  in  every  case,  especially  in  Form 
12,  the  records  should  be  presented  in  the  shortest 
time  after  the  occurrence  so  that  conditions  may  be 
known. 

Co-operation  of  the  executive  organization  be- 
comes in  labor  costs  a  large  asset.  With  the  mul- 
titudinous operations  occurring  all  over  the  plant, 
that  executive  would  be,  to  say  the  least,  very  in- 
effective, who  did  not  see  that  the  records  were 
freely  displayed  to  as  many  of  his  staff  as  have 
oversight  of  the  work,  a  controlling  mind,  or  an  in- 
genuity in  device,  mechanical  or  human.  For,  be- 
cause of  the  great  mass  of  detail  and  the  large  pos- 
sibilities that  lie  in  labor,  of  saving  and  of  loss,  of 
energizing  or  of  relaxation,  the  best  results  can 
be  obtained  only  through  co-operation  of  the  whole 
executive  organization.  Thus  the  application  of 
the  elements  of  philosophy  is  especially  essential 
in  consideration  of  this  element. 

Of  course,  as  is  true  of  any  fact  shown  by  costs, 
the  showing  of  labor  from  the  cost  viewpoint  can 
be  of  value  only  as  it  forms  the  basis  for  action. 
Not  alone,  however,  do  these  labor-cost  records 
have  a  definite  and  moral  effect  on  the  organiza- 
tion and  the  operatives,  in  that,  knowing  that  the 
times  of  operation  and  production  are  recorded 


LABOR    FROM    THE    COST    VIEWPOINT       95 

and  compared,  they  will  endeavor  to  make  these 
records  speak  favorably  for  themselves ;  but  if  they 
come  under  the  eye  of  the  executive,  the  variations 
of  the  records  will  force  him  in  the  end  to  seek 
and  maintain  modern  methods  of  arrangement,  of 
assistance  and  incentive  to  labor,  in  his  desire  and 
attempt  to  study  and  reduce  costs. 

An  important  reason,  of  course,  why  it  is  espe- 
cially valuable  to  reduce  labor  cost  is  that,  since 
expense  cost  per  unit  of  production  varies  with  the 
labor  cost  on  principle,  as  will  be  discussed  later, 
when  labor  cost  is  reduced  in  proper  ways,  expense 
cost  likewise  goes  down.  Thus  it  is  especially  im- 
portant to  watch  this  element,  in  that  its  control 
affects  two  of  the  three  elements  of  cost. 

But  the  element  of  labor  is  particularly  one  of 
which  ample,  yet  simple,  records  should  come  be- 
fore the  eyes  of  the  executive  and  his  organization 
constantly  and  promptly,  not  only  because  of  its 
elasticity  and  because  of  the  fluctuation  of  the  ele- 
ment of  expense  with  it,  but  because  it  is  a  human 
element  with  a  reasoning  ability,  readily  susceptible 
to  the  moving  power  of  facts,  but  very  unbelieving 
of  statements  made  of  itself,  unbacked  by  the  proof 
of  truth. 

The  wise  executive,  anxious  for  improvement  in 
this  most  important  element,  then,  makes  no  mis- 
take in  appreciating  the  necessities  and  peculiari- 


96     COST  REPORTS  FOR  EXECUTIVES 

ties  of  human  nature,  provides  himself  freely  with 
the  facts,  and  submits  them  willingly  and  confi- 
dently to  his  executive  organization.  But  still  fur- 
ther he  will  make  no  mistake  in  taking  into  his 
confidence,  as  far  as  seems  necessary,  the  actual 
manufacturers  of  these  records — labor,  itself — so 
that,  understanding  the  reasons  and  values,  and 
obtaining,  under  a  wise  management,  a  part  of  the 
reward,  it  may  produce  results  not  merely  worth 
while,  but  sometimes  unbelievable.  But  the  record 
is  the  first  necessity. 


THE  VEXING  QUESTION  OF  EXPENSE 


CHAPTER   VI 

THE  VEXING  QUESTION  OF  EXPENSE 

TT^VERY  executive  can  understand  the  relation 
■^  of  material  value  to  unit  production  cost,  and 
thinks  he  can  control  it.  Its  application  is  direct. 
Every  executive  can  appreciate  the  application  of 
labor  charge  to  article  cost,  even  if  he  has  not  de- 
veloped methods  that  control  it.  But  when  the 
vexing  question  of  expense  arises  there  is  a  variety 
of  opinion  as  to  its  application  to  unit  costs.  Who 
shall  devise  a  non-disputable  way  to  apply  the  sal- 
aries of  the  executive  organization,  for  instance,  as 
an  item  of  expense  to  each  unit  of  production, 
when  many  of  the  units  it  may  never  think  of,  and 
others  may  be  the  source  of  much  time  and  expen- 
diture? 

And  certainly,  to  most  executives,  expense,  as 
an  element  struggling  against  control,  is,  to  say 
the  least,  a  matter  of  constant  anxiety.  The  con- 
sideration of  expense  as  a  cost  item,  then,  has  to 
do  with  two  main  points: — 

1. — Its  relation  to  the  cost  of  the  salable  article. 

2. — The  control  of  the  expenses  of  the  factory 
through  proper  presentation  of  the  running  facts 
of  operation. 

99 


100  COST    REPORTS    FOR    EXECUTIVES 

Much  has  been  and  will  yet  be  written  on  this 
first  point,  and  a  number  of  different  theories  as 
to  the  proper  method  of  expense  application  have 
been  advanced. 

Thus,  we  have  theories  of  expense  addition  in 
proportion  to  units  of  weight  or  measures  [the 
most  common  one],  to  material  cost,  to  material 
and  labor  cost,  to  labor  cost,  to  the  labor  hour,  to 
the  machine  hour,  or  to  various  combinations  of 
these  bases.  And  it  cannot  be  denied  that  there 
are  cases  where  each  theory  seems  most  suitable. 

That  there  are  so  many  theories  is,  possibly,  not 
a  little  due  to  the  fact  that  there  is  no  positively 
right  one,  but  nevertheless  the  necessity  for  theory 
exists.    But  the  theory  must  be  a  practical  one. 

Now,  the  statement  that  there  is  no  theoretically 
right  way  to  add  expense  to  a  particular  unit  cost 
must  be  modified  somewhat,  because  a  clear  under- 
standing of  this  element  of  cost,  and  its  use,  lies 
not  merely  at  the  bottom  of  the  proper  conception 
and  use  of  a  cost  system,  but,  on  account  of  the 
necessary  changes  in  expense  due  to  any  change 
in  management  methods,  it  lies  more  importantly 
at  the  base  of  proper  comprehension  of  the  prin- 
ciples of  factory  operation,  of  the  meaning  and 
value  of  modern  methods,  and  of  the  struggle  for 
efficiency ;  and  it  is  a  crucial  element  of  profit  mak- 
ing. 

It  is  not  to  be  understood  by  this  statement, 


THE  VEXING  QUESTION  OF  EXPENSE       101 

then,  that  there  are  not  many  items  of  expense 
which  are  clearly,  and  in  measurable  amounts, 
chargeable  to  the  production  of  some  particular 
article,  since  they  may  be  due  to  such  production; 
or  that  there  are  not  many  expenses  which  may  be 
fairly  chargeable  to  each  article  of  manufacture 
in  certain  calculable  amounts,  or  along  certain  rea- 
sonable lines,  though  general  to  the  whole  produc- 
tion. There  are  direct  expenses  and  others  not  so 
direct,  which,  nevertheless,  by  varying  and  evident 
theories,  can  and  should  be  directly  applied.  But 
there  are  many  and  large  items  of  expense  neces- 
sary to  the  whole  production,  however  it  may  vary, 
which  touch  the  production  of  any  particular  ar- 
ticle in  no  direct  manner,  which  do  not  vary  with 
production  in  any  close  degree,  and  which  resist  all 
attempts  to  be  handled  as  direct  items  of  cost  like 
labor  and  material.  These  expenses  are  indirect. 
They  have  distinctly  to  do  with  the  whole  produc- 
tion, without  having  a  readily  measurable  relation 
to  the  unit. 

It  is  to  meet  this  condition  that  theories  are  de- 
vised. Each  theory  advanced  will  be  valiantly  up- 
held by  those  who  feel  they  have  reasoned  the  mat- 
ter out.  But  it  must  be  remembered  that  it  is  gen- 
erally a  failing  of  the  formation  of  theories  in 
relation  to  complicated  conditions,  that,  once  the 
basic  theory  is  established  from  one  main  fact,  all 
other  facts  are  made  to  fit  around  it.    We  con- 


102  COST    REPORTS    FOR    EXECUTIVES 

stantly  see  this  illustrated  in  our  own  theories  of 
government,  of  which  the  tariff  has  long  been  a 
notable  instance. 

Now,  in  forming  a  theory  of  expense  applica- 
tion, there  are  two  elements  to  be  taken  into  con- 
sideration with  which  expenses  vary,  even  if  in  no 
absolutely  measurable  degree,  viz.: — 

1. — Time,  or  the  labor  hours  of  factory  opera- 
tion. 

2. — Condition  of  operation,  or  the  physical  and 
mechanical  conditions  surrounding  each  operation. 

It  is  very  apparent  that  there  are  many  expenses 
which  vary  with  time,  by  the  month,  week,  or  hour, 
such  as  salaries,  rent,  indirect-labor  costs,  etc. 

It  is  equally  apparent  that  there  are  other  ex- 
penses which  vary  not  only  with  time,  but  also  with 
condition  of  operation.  No  great  argument,  for 
instance,  is  needed  to  show  that  it  is  more  expen- 
sive per  hour's  work  done  on  a  heavy  machine  re- 
quiring much  power,  costly  upkeep,  expensive 
tools,  etc.,  than  on  a  small  one,  and  that  the  con- 
ditions of  operation  make  the  difference. 

Operating,  then,  with  these  two  measures  of 
variation,  it  is  possible  to  apply  all  expenses  to 
units  of  production.  But  in  any  plant  of  size 
there  is  a  large  variety  of  conditions  of  operation 
and  numerous  items  of  expense  having  apparently 
somewhat  different  bearings.  It  is,  therefore,  nec- 
essary to  form  some  basis  of  relation,  some  chan- 


THE  VEXING  QUESTION  OF  EXPENSE       103 

nels  of  flow,  some  theory  of  application  and  visu- 
alization of  expenses,  that  will  permit  the  execu- 
tive to  bring  order,  direction,  and  control,  out  of 
a  heterogeneous  group. 

The  old  and  simple  way  of  dividing  total  ex- 
pense by  total  production  will  no  longer  give  suf- 
ficiently close  costs.  Except  in  very  few  plants 
manufacturing  a  uniform  product,  it  no  longer 
suits  modern  conditions  of  competition;  and  to 
work  out  figures  for  each  condition  of  operation 
(which  in  many  plants,  if  carried  out  in  detail, 
might  mean  a  different  figure  for  almost  every 
operation)  presents  a  task  almost  too  large  for 
the  ordinarily  obtainable  talent. 

A  midway  solution,  then,  seems  desirable,  but 
the  theory  adopted  must  be  one  which  leads  to  the 
most  practical  results  in  the  long  run,  for  costs, 
to  be  valuable,  must  render  practical  value.  In 
arriving  at  a  solution  certain  facts  and  conditions 
should  be  considered. 

When  the  subject  of  costs  meets  the  considera- 
tion of  most  executives,  they  think  only  of  its  value 
as  leading  to  knowledge  of  the  cost  of  the  salable 
article.  This  is,  of  course,  a  very  important  point 
and  if  it  were  the  only  point  and  absolutely  gauged 
selling  price,  then  much  detail,  if  it  led  to  truer 
cost,  need  not  be  feared.  But  in  actual  good  prac- 
tice the  second  point,  control  of  expense,  comes  to 
be  of  prime  importance  after  the  first  knowledge 


104    COST  REPORTS  FOR  EXECUTIVES 

of  cost  of  articles  has  been  obtained,  absorbed,  and 
used  as  best  it  may.  Therefore,  any  theory  of  ex- 
pense addition  that  does  not  take  this  necessity 
into  account,  does  not  thoroughly  fit  the  case. 

For  expense  is  a  factory  disease  and  an  insidi- 
ous one.  It  is  not  meant  by  this  that  expense  may 
not  profitably  be  large,  or  that  profits  may  not, 
under  proper  conditions,  be  increased  by  increasing 
expense  ratio.  Scientific  management  is  a  definite 
preachment  that  this  is  so,  and  the  average  factory 
common  sense  is  learning  that  money  spent  in 
studying  operations,  and  in  making  complete  ar- 
rangements for  their  fulfillment,  is  an  expense  that 
is  most  often  much  more  than  made  up  by  reduc- 
tion in  other  costs.  But  just  as  the  human  system 
is  full  of  microbes,  well  balanced  in  health  and 
presumably  an  essential  part  of  existence,  but  li- 
able under  adverse  circumstances  to  break  out  to 
the  disadvantage  of  the  container,  so  it  is  with  the 
factory  system  and  expense;  which  latter,  because 
of  varying  judgments,  misplaced  efforts,  or 
thoughtless  management,  has  a  constant  tendency 
to  unprofitable  excess. 

The  executive,  like  the  Chinese  doctor,  desiring 
to  keep  his  plant  healthy  rather  than  to  cure  it 
when  sick,  should  have  his  expenses  so  displayed 
in  relation  to  the  running  situation  as  to  be  al- 
ways able  to  control  them.  But  in  accomplishing 
this  there  must,  of  course,  be  kept  in  mind  the  ne- 


THE  VEXING  QUESTION  OF  EXPENSE      105 

cessity  of  arriving  at  an  article  cost  which  is  ap- 
proximately fair  and  true  as  a  basis  for  meeting 
competition. 

Now  the  cost  problem,  while  it  has  to  do  with 
figures,  is  not  a  true  mathematical  problem  in  the 
sense  that  there  is  but  one  practical  answer  under 
given  conditions.  Cost  is  not  a  matter  of  figures ; 
it  is  a  matter  of  ideas,  of  which  figures  are  only  the 
suggesting  elements.  There  can  be  only  an  ap- 
proximately true  and  fair  cost  of  an  individual 
article  obtained  even  though  the  cost  of  total  pro- 
duction is  mathematically  exact,  which  leads  us  into 
some  discussion  of  expense,  the  constant  mutations 
of  cost,  and  the  fixing  of  selling  prices. 

Certain  expenses  are  spoken  of  as  fixed  expenses, 
but  they  seldom  remain  fixed  over  any  long  period. 
There  is  a  constant  attempt  to  make  production 
vary — generally  to  make  it  increase.  The  loudest 
cry  of  the  factory  executive  is  for  production  in- 
crease with  the  very  intention  of  varying  the  unit 
expense  cost — downward  of  course — though  this 
cry  is  often  checked  by  public  demand  or  other 
conditions.  The  successful  effort  finds  its  result 
in  keeping  the  relation  of  these  two  variants,  or 
the  percent  of  expense,  within  planned  limits,  or 
constantly  downward  in  trend. 

It  must  be  constantly  borne  in  mind,  in  forming 
a  theory  of  expense  application,  that,  in  the  final 
analysis,  total  expense  applies  strictly  to  total  pro- 


106  COST    REPORTS    FOR    EXECUTIVES 

duction,  and,  without  changing  the  particular  con- 
ditions of  operation,  the  expense  cost  per  unit  of 
production  may  vary  very  remarkably  from  time 
to  time.  For  instance,  in  dull  times,  though  there 
may  be  absolutely  no  change  in  particular  condi- 
tions of  operation,  the  expense  cost  per  unit  takes 
a  swift  upward  trend.  It  is  to  prevent  this  that, 
in  such  periods,  our  manufacturers  sell  very  cheap- 
ly abroad,  if  not  at  home. 

And  this  leads  to  the  fact  that  when  discovery  of 
net  losses  in  certain  articles  is  made  it  does  not  al- 
ways increase  total  profits  to  discontinue  their  man- 
ufacture. It  may  frequently  decrease  profits  to 
cut  out  losing  articles  unless  their  place  in  the  total 
production  is  taken  by  profit  makers.  This  will 
always  be  so  where  the  loss  on  an  article  is  less 
than  the  general  expense  burden  it  bears,  for, 
whereas  the  rest  of  the  manufacture  only  has  to 
carry  the  loss  in  one  case,  if  the  article  is  dropped 
the  remaining  articles  have  to  carry  the  greater 
burden  of  expense.  Of  course  unprofitable  articles 
should  be  dropped  (providing  the  cost  cannot  be 
sufficiently  reduced)  if  they  can  be  replaced  by 
other  profitable  ones.  But  the  question  of  final 
profit  has  always  to  do  with  total  production  and 
its  relation  to  total  expense,  and  the  practical 
theory  of  expense  application  and  showing  must 
deal  with  this  question. 

There  is  no  such  thing  as  an  absolute  or  fixed 


THE  VEXING  QUESTION  OF  EXPENSE      107 

unit  cost.  Even  if  the  material  cost  of  a  given 
article  did  not  vary  in  different  lots  (and  it  does, 
because  of  variations  in  waste  percent  if  not  in 
base  cost)  and  if  labor  cost  did  not  vary  (as  it 
does  in  most  factories )  — nevertheless,  since  the  to- 
tal expense  must  be  divided  over  total  production, 
and  since  these  two  are  constant  variants,  yet  sel- 
dom varying  together,  it  follows  that  expense  cost 
per  unit  is  constantly  varying. 

It  is  also  a  fact,  that,  except  in  the  case  of  mo- 
nopolies or  special  articles,  and  frequently  even  in 
their  case,  the  price  is  fixed  by  competition,  or  a 
figure  that  will  stimulate  demand,  and  not  by  the 
cost  of  the  article  in  any  particular  plant.  As 
a  matter  of  fact  the  selling  price  often  fixes  the 
cost,  since  many  an  article  is  definitely  made  to 
sell  at  a  prefixed  figure  and  the  costs  are  arranged 
accordingly,  and  where  cost  has  been  the  basis  of 
the  selling  price  it  has  generally  been  a  cost 
roughly  estimated  and  not  scientifically  worked 
out.  The  main  value  in  the  knowledge  of  unit  cost 
in  most  plants  is  not  to  fix  the  selling  price,  then, 
but  to  lead  to  methods  of  cost  reduction  and  con- 
trol. So  that  in  the  interest  of  the  attainment  of 
an  expense  showing  which  will  give  the  executive 
a  grip  on  it,  there  may  be  safely  sacrificed  some  of 
the  effort  to  get  an  apparently  closer  cost  by  figur- 
ing too  finely  the  expense  cost  of  individual  con- 
ditions of  operation. 


108    COST  REPORTS  FOR  EXECUTIVES 

Furthermore  the  human  element  enters  some- 
what into  this  problem.  The  executive  mind  de- 
mands methods  simple  and  easy  to  follow,  meth- 
ods that  make  comparisons  over  periods  of  time 
fairly  easy,  and  particularly  methods  that  show 
quickly  the  reasons  of  changes  for  the  better  or 
worse.  Add  to  this  the  further  fact,  that  for  con- 
tinued life  it  is  essential  in  most  plants  that  the 
cost  system  be  one  not  subject  to  constant  read- 
justments on  account  of  slight  changes  in  condi- 
tions of  operation,  on  account  of  the  undesirability 
of  the  amount  of  calculations  that  would  be  neces- 
sary, the  failure  on  the  part  of  the  cost  force  to 
appreciate  the  changes,  and  the  spoiling  of  com- 
parisons with  constant  readjustment. 

Let  us  see,  then,  in  brief  recapitulation,  what 
are  the  elements  to  consider  in  forming  a  theory  of 
expense  application  and  showing.  It  will  appear 
to  the  practical  man  that  there  exist  the  following 
conditions,  which  must  be  taken  account  of  in  any 
such  undertaking,  viz. : 

That  in  addition  to  certain  expenses  that  have 
a  direct  application  to  the  cost  of  the  articles  of 
manufacture,  there  is  a  large  floating  expense  due 
to  the  existence  of  the  business  and  the  policies 
adopted,  which  applies  not  to  particular  articles 
but  to  the  whole  production,  but  which  does  not 
vary  as  it. 

That  with  expense  added,  the  final  cost  of  an 


THE  VEXING  QUESTION  OF  EXPENSE      109 

article  must  vary,  and  can  be  only  approximately 
fair  and  true. 

That  while  selling  price,  for  profit,  must  aver- 
age higher  than  cost,  nevertheless  exactly  attained 
cost  has  never  been  the  basis  of  fixing  selling  price, 
and  that  even  individual  unit  cost  has  its  greatest 
value  as  a  basis  of  intelligent  cost  reduction  and 
cost  control. 

That  total  plant  profit  is  made  only  as  a  result 
of  the  total  production,  interlaced  so  to  speak ;  and 
that  changes  in  the  line  of  articles  produced,  based 
on  article  cost  as  a  guide,  will  not  produce  the 
mathematical  result  in  plant  profit  the  unit  cost 
would  seem  to  indicate,  and  that  consequently  ex- 
pense, which  causes  this  vagary,  must  be  shown 
in  some  clear  relation  to  production,  or  some  kin- 
dred indicative  element,  so  that  changes  in  pro- 
duction will  immediately  reflect  themselves  in 
changes  in  expense  ratio,  increased  production 
showing  decreased  ratio,  and  decreased  production 
causing  increased  ratio. 

That  it  is  essential  to  make  such  showing  of  ex- 
pense and  its  application  as  will  offer  the  executive 
characteristic  and  comparative  views  of  it,  as  a 
means  of  control,  and  that  a  main  value  of  costs  is 
to  present  pictures  of  events,  in  order  that  im- 
perfect service  may  be  discovered  and  remedies 
provided.  Costs,  of  value,  must  be  presented  by 
a  method  which  is  a  quick  tattle-tale. 


110  COST    REPORTS    FOR    EXECUTIVES 

That  comparisons  are  essential,  and  the  methods 
used  must  offer  them — covering  the  general  situa- 
tion, even  if  slurring  some  minor  changes. 

That  to  have  continued  existence  the  cost  system 
must  be  simple,  simply  kept  up,  and  readily  un- 
derstandable. 

That  expenses  tend  to  vary  according  to  two 
main  elements,  time  and  condition  of  operation, 
and  these  must  form  the  basis  of  expense  applica- 
tion. It  must  be  remembered,  however,  that,  while 
expenses  tend  to  vary  as  these  elements,  in  the 
case  of  very  many  expenses  it  is  only  a  tendency 
and  not  an  absolute  ratio. 

Working,  then,  from  these  conditions  and  neces- 
sities, it  is  not  difficult  to  arrange  the  expenses  ac- 
cording to  like  groups  of  conditions  of  operation, 
and  show  them  in  this  arrangement  in  relation  to 
the  time  of  their  use  in  given  periods,  preferably 
by  weeks  or  months.  Such  groups,  in  most  fac- 
tories, will  develop  into  classification  by  depart- 
ments, or  divisions  thereof,  as  the  conditions  of 
operation  may  vary  in  the  departments,  and,  of 
course,  may  be  made  in  what  detail  the  executive 
desires.  But  he  will  generally  be  wise  not  to  make 
such  divisions  too  fine. 

Under  such  a  plan  there  readily  occur  groupings 
of  such  like  conditions  of  operation  as  general  ex- 
pense, department  expense,  department  division 
(where  conditions  are  radically  different)  and  sell- 


THE  VEXING  QUESTION  OF  EXPENSE      111 

ing  expense.  But  before  these  are  arrived  at  there 
must  be  a  grouping  of  certain  miscellaneous  con- 
ditions of  operation,  as  depreciation,  taxes,  insur- 
ance, power,  repair,  etc.,  and  a  dispersion  of  their 
totals  among  the  other  groups  (hereafter  to  be 
called  departments)  in  proportion  to  their  average 
or  particular  use  in  those  departments. 

It  may  be  further  said  here  that  even  after  such 
divisions  are  made  there  are  certain  expenses  which 
have  to  do,  not  with  time  or  condition,  but  with 
other  units.  These  expenses  are  very  apparent  in 
their  application,  however,  and  should  be  separate- 
ly so  shown. 

Forms  13, 14, 15, 16,  17,  18  and  19  illustrate  this 
method  of  expense  analysis. 

The  period  chosen  may  be  either  of  the  week  or 
month — by  the  week  preferably — until  expense  is 
under  good  control,  and  its  application  is  analyzed 
and  understood.  If  kept  by  the  month,  however, 
this  method  resolves  itself  into  a  very  simple  affair. 

It  may  be  well  to  say  here  that  under  such  a  plan 
of  expense  analysis  the  use  of  the  "Voucher  Regis- 
ter," Form  20,  offers  a  very  simple  arrival.  This 
book,  as  will  be  seen,  is  an  entry  book  for  all  money 
spent  whatsoever.  Under  the  column  "Expense," 
go  all  the  items  so  chargeable,  which  may  find 
their  analysis  under  the  column  "Explanation,"  in 
whatever  detail  may  be  desirable  to  make  up  the 
analysis  at  the  end  of  the  week  or  month,  the  to- 


112  COST    REPORTS    FOR    EXECUTIVES 

tals  of  which  must  agree  with  the  totals  of  the 
" Voucher  Register"  and  consequently  with  the  one 
ledger  account  "Expense"  which  this  method  per- 
mits. By  such  a  method  it  is  no  great  task  to  make 
up  an  expense  analysis  in  a  short  time,  each  month, 
even  if  there  be  fifty  or  more  departments. 

It  may  not  be  needless  to  give,  here,  some  slight 
description  of  these  forms  and  their  application  to 
the  use  of  the  industrial  executive. 

Form  13  shows  a  division  of  depreciation,  taxes, 
and  insurance  among  the  different  departments. 
It  is  not  the  purpose  here  to  go  into  lengthy  dis- 
cussions of  certain  details,  because  almost  all  the 
details  of  expense  will  bear  much  consideration.  It 
may  be  said,  briefly,  that  a  conservative  deprecia- 
tion would  be  10  per  cent  on  machinery  and  equip- 
ment, and  2%  to  5  per  cent  on  buildings,  although, 
for  those  who  desire  or  feel  the  necessity  for  de- 
tail, each  unit  of  investment  may  be  depreciated 
separately  and  according  to  experience  or  estimate. 
Depreciation,  taxes,  and  insurance  are  apportioned 
to  the  departments  according  to  investment  therein. 

Form  14  shows  the  details  and  totals  of  power 
cost,  and  its  division  between  the  departments  in 
proportion  to  average  use. 

Form  15  shows  the  details  of  repair  cost  and  its 
apportionment  to  the  different  departments  ac- 
cording to  the  actual  expenditures  in  them. 

Form  16  shows  the  general  expenses. 


Rate  for  Previous  3  Years  April,     1912 — 4      I 
12^,    13^,    14ctS.               Month         Perioi 

2,500.00 

10,  ( 

"     Stationery    

93.08 

~ 

0.00 

Telephone 

30.00 

Incoming  Express 

43.18 

"         Freight   

340.00 

Trucking 

118.30 

Watching    81.00 

Miscellaneous  General  Labor.  .11        135.09 

Miscellaneous  General  Supplies          2oo  .  42 

General  Repair  Labor ^50 .  00 

11            "        Materials .... 

262.18 

Pensions,  Insurance,  etc 

902.80 

1, 

Donations   

75.00 

Legal  Expense 

200.00 

L,: 

5,314.05 

•  5 

Total  Direct  Hours 

32,640.00 

106, 23 

Cost  per  Hour 

16^    cts. 

15L»: 

Showing,  in  any  desired  detail, 
are  general  to  the  whole  plant, 
monthly  and  period  figures,  and 
relation  of  expense  to  direct-1? 
sired  to  direct  labor. 


FORM  13— EXPENSE  ANALYSIS 


This  form  shows  a  simple 
method  of  division  of 
these  items  to  the  dif- 
ferent departments  ac- 
cording to  investment 
therein. 


Depbeciation,  Taxes,  Ins. 

Pen 

Cent. 

Yeai 

512,000.00 
4,000.00 
2,800.00 
18,800.00 

Year 

1,566.67 

10 
50 
20 
10 

156.66 
156.66 
783.34 
313.34 
156.67 

■■  3 : 

51,566.67 

This  form  shows  this  cost 
in  detail  and  division 
among  departments  accord- 
ing to  average  use. 


FORM  14— EXPENSE  ANALYSIS— POWER,  HEAT  AND  LIGHT 


ril,    1912-4  Weeks 
Month      Period  to  D\te 

214.00 
365.80 
998.70   L    ,000.11 


May,    1912-4  Weeks 
Month      Pebiod  to  Date 

221.60 


362.52 

,930.00 

32.00 


Repair  Labi 

Repatr  Material 
Boiler  Repair  Parts 
Engine  Repair  Parts. 
Gaskets 

Miscellaneous  

Depreciation,  Taxes,  Ins 
Total    


Department 

1,  19  ! 

2,  11- 

3,  47% 

4,  23S 


12.36  59.60 

156.67 
3,118.7' 
■  s— Based  on  Average  H.  P.  Used 


100" 


.92 
17.80 
28.11 
46.14 


.42 

5.12 

156.67 


592.56  542.55 

333.06  334.10 

1,465.81  6,542.31   1,342.09 

727.32  636.73 

3,118.75  13.919.81   2,855.53 


4.52 

17.80 

176.27 

149.10 
414.17 


64.72 

783.35 


FORM   15— EXPENSE  ANALYSIS— REPAIRS 


L 


April,   1912  -  4  Weeks 
Period  to  Dv 


Date 


176.76 

1,485 

38     1 

89.60 

42     1 

243.80 

86     ] 

18.60 

92 

63     | 

105.91 

919 

81     J 

153.32 

1,034 

18    1 

Month 

ToD 

™ 

Shows  details  of  repair  cost  and  division 
of  same  between  the  departments  where  it 
was  spent. 


FORM  r6— EXPENSE  ANALYSIS— GENERAL  EXPENSE 


Iti  i  m:  rMBKT  No.   1 


FORM  17— EXPENSE  ANALYSIS 


Showing,  in  any  desired  detail,  those  expenses  which 
are  general  to  the  whole  plant.      They  are  shown  in 
monthly  and  period  figures,  and  in  comparisons  with 
relation  of  expense  to  direct-labor  hours,   or  as  de- 
sired to  direct  labor. 


Rate  for  Previous3  Years    April,    1912—4   Weeks       May,    1912 — 4  Weeks 
35,    36,    34   Cts.  Month       Period  to  Date  Month      Period  to  Date 


Foreman       196.00 

Inspectors 120-°° 

Miscellaneous  Labor 148.60 

Repair  Labor 164.11 

Rip 


Ma 


31.40 


Parts i42'" 


I  Hepa 


Srrri 


59.06 
583.00 
196.57 


3.42 
64.18 
16.08 


62.48 
647.18 
212.65 


116.95 
198.34 
Total  Controllable  Expense,1.  196.08 

Power,  Heat  and  Light |       592.  56 

Dopi  ciation,  Taxes  and  ]■>* 
Total  Expense 


Form  17  shows  department 
expenses  in  detail  by 
months  and  periods,  in  com- 
parison with  previous  rec- 
ords, and  in  relation  to 
direct-labor  hours  or  di- 
rect-labor cost.  The  ex- 
pense is  divided  into  con- 
trollable expense  (which 
occurs  under  direct  sup- 
ervision of  foreman)  and 
other  expenses  properly 
chargeable  to  the  depart- 
ment. 


>JALYSIS 


lay,   1912—4  Weeks 

Month   Period  to  Date 


nth   Pi 


196.00  980.00 

123.60  610.20 

83.49  615.56 

93.08  563.07 


3.42 
64.18 
16.08 

2.15 

3.12 

585.12 


62.48 
647.18 
212.65 

124.10 

204.24 

4,019.48 


542.55    3,187.31 


156.66 


284.33 


,561 


783.30 


7,990.09 


29,121 


\   cts.     28^  cts. 
570.48    7,260.48 
94         114 


Form  17  shows  department 
expenses  in  detail  by 
months  and  periods,  in  com- 
parison with  previous  rec- 
ords, and  in  relation  to 
direct-labor  hours  or  di- 
rect-labor cost.  The  ex- 
pense is  divided  into  con- 
trollable expense  (which 
occurs  under  direct  sup- 
ervision of  foreman)  and 
other  expenses  properly 
chargeable  to  the  depart- 
ment. 


THE  VEXING  QUESTION  OF  EXPENSE       113 

Form  17  shows  the  department  expenses  with 
their  additions  from  other  departments.  There 
will,  of  course,  be  as  many  of  these  showings,  in 
the  expense  analysis,  as  there  are  departments  or 
divisions  made  to  cover  the  productive  portion  of 
the  plant.  The  expense  of  the  department  is  to- 
taled first  to  a  "Controllable  Expense,"  this  being 
the  amount  occurable  in  the  department,  and  so 
under  the  control  and  supervision  of  the  foreman. 

Now,  in  all  these  forms  which,  complete,  give 
an  analysis  of  expenses,  there  is  to  be  noted  that, 
month  after  month,  the  expenses,  in  all  detail  de- 
sirable, are  shown  comparatively,  and  likewise  the 
additions  of  the  same  to  date  from  a  given  start, 
generally  the  first  of  the  year  or  inventory  time, 
these  latter  additions  being  known  as  period-ex- 
penses. Any  increase  or  decrease  can  be  imme- 
diately noted. 

In  addition,  the  relation  of  the  expenses  is  shown 
to  the  running  productive  situation.  This  is  ex- 
pressed, preferably,  as  a  cost  per  productive  or 
direct-labor  hour,  such  hours  of  each  department 
being  kept  for  each  month  and  an  expense  cost  per 
hour  worked  out.  But  in  departments  where  the 
work  is  similar  and  the  wages  of  employees  are 
practically  alike,  it  is  as  effective  to  show  the  rela- 
tion of  expenses  to  the  direct  or  productive  labor. 
Both  methods  are  illustrated.  Thus,  with  such  a 
constant  and  easily  readable  showing  of  expense 


114  COST    REPORTS    FOR    EXECUTIVES 

and  its  relations  to  the  running  production  in  all 
the  different  departments,  the  executive  has  an  op- 
portunity to  study  expense,  to  experiment  with  it, 
and  to  control  it. 

But  to  make  it  as  easy  as  possible,  Form  19  is 
added. 

This  form  is  a  synopsis  of  the  whole  situation, 
showing  first  the  index  figure  for  the  plant,  and 
then  the  index  figures  for  the  departments  with 
plant  index  figures  for  previous  years.  Through 
this  the  executive  can  put  his  finger  on  the  weak 
spot,  monthly,  without  poring  over  the  whole  situ- 
ation, and  in  a  very  short  time  can  compare  the 
plant  situations  with  previous  periods.  In  this 
particular  form  the  expense  is  shown  in  relation  to 
direct  labor,  but  can  easily  be  shown  in  relation  to 
productive  or  direct-labor  hour. 

As  will  be  seen,  expense  cost  as  applied  to  an 
article  varies  as  labor  cost  or  labor  time.  This  is 
an  important  fact,  for  if  the  time  of  labor  opera- 
tions can  be  shortened,  the  expense  cost  as  well  is 
reduced,  and  with  proper  means  of  assuring  him- 
self of  the  facts,  the  executive  can  afford  to  in- 
crease such  expense  as  is  caused  by  the  study, 
preparation  for,  and  assistance  to  labor,  with  the 
idea  of  reducing  operation  time,  knowing  that  he 
can  readily  discover  quickly  the  total  cost-labor 
and  expense — and  compare  it  with  previous  condi- 
tions. 


FORM  18— EXPENSE  ANALYSIS 

.     SELLINC 

1  AND  ADVERTISING 

May,    1912 — 4  Weeks 
Month        Period  to  Drip 

Rate  FOB  Pheviohs  3  Yeahs 

April,  1912 — 4  Weeks 
Month        Period  to  Date 

10,   9,  9i% 

1,500.00 

6,000.00 

1,500.00 

7,500.00 

Traveling  Expenses . 

373.16 

1,115.10 

291.14 

1,406. 

125.97 

395.20 

43.00 

43^;. 

14.18 

42.20 

6.20 

48. 40| 

42.26 

153. 19 

15.13 

168 

Freight 

464.16 

1,026.18 

432.00 

1,451 

93.18 

270.91 

75.62 

346. 

Bad  Debts 

118.12 

138.12 

0.00 

138.  1 

468.00 

075.26 

0.00 

675. 

Samples 

58.17 

216.90 

24.93 

241  . 

1,420.00 

5,680.00 

1,420.00 

7,100 

1,230.00 

2,059.00 

900.00 

2,959 

5,907.20 

17.772.12 

4,708.02 

:-r.;\48o.  14 

Total  Sales 

Per  Cent.  Expenses  to  Sales . . 

65,635.63 

9. 

207,960.48 
8.5 

59,654.80 
7.9 

267, 6::  l 

8.4 

NOTE.        This    fnrm   a 

• 

• 


in  relation  to  sales.  Selling  expense  may  be  depart- 
ment ised  where  permissible  along  the  same  lines  and 
shown  in  as  much  detail  as  desirable.  Advertising  may 
be  separated  and  shown  as  to  lines  advertised. 


THE  VEXING  QUESTION  OF  EXPENSE      115 

Form  18  gives  selling  expense,  which  is  shown  in 
relation  to  sales,  or  indicating  the  number  of  cents 
it  takes  to  sell  a  dollar's  worth  of  goods.  Here, 
it  will  be  observed,  are  added  cash  discounts  taken 
by  customers,  and  bad  debts.  The  selling  may  be 
departmentized  where  there  exist  definite  divisions, 
and  the  advertising  may  be  shown  in  relation  to 
particular  articles,  or  classes. 

As  will  be  seen  in  Form  4  (see  page  57),  ex- 
pense is  added  on  unit  production  cost,  when  labor 
time  or  cost  is  known,  first  as  a  charge  per  total 
hours  for  general  expense,  followed  by  a  charge 
per  productive  or  direct-labor  hour  in  each  depart- 
ment, or  as  a  per  cent  on  direct  labor,  as  the  choice 
may  be.  Selling  expense  being  added,  the  com- 
plete tale  of  expense,  in  its  relation  to  the  salable 
article,  is  told. 

There  may  be  disputes  as  to  whether  sundry 
items  should  be  put  into  expense  and  the  practice 
is  varied  in  this  matter.  A  good  practical  basis 
of  operation,  however,  in  these  matters,  is  that 
costs  should  be  made  as  high  as  they  legitimately 
can,  and  that  the  difference  between  cost  and  sell- 
ing price,  if  a  profit,  should  be  a  final  one  from 
which  are  to  be  deducted  not  even  contingencies. 
Human  nature  needs  the  spur  of  necessity  to  make 
improvements  and  a  high  cost  is  a  valid  incentive 
to  action  in  that  direction.  Depreciation,  and  a 
high  one,  on  tools  and  apparatus  liable  to  change, 


116  COST    REPORTS    FOR    EXECUTIVES 

losses  on  material  when  they  cannot  be  charged  to 
an  article  of  manufacture,  samples,  cash  discounts, 
bad  debts,  and,  under  some  circumstances,  inter- 
est, and  in  fact  every  charge  which  does  not  be- 
long to  the  material  or  labor  costs,  should  be  put 
into  costs.  It  is  healthy  cost  where  the  dollar  of 
profit  can  be  placed  in  the  bank. 

The  method  outlined  is  not  a  new  theory.  It 
has  been  in  very  successful  practice  for  at  least 
eight  or  ten  years,  and  is  now  in  operation  in  some 
one  hundred  or  more  plants. 

The  philosophy  of  cost  has  nowhere  a  more  im- 
portant bearing  than  in  dealing  with  the  expense 
analysis. 

Practical  accuracy,  it  is  very  plain,  is  the  only 
term  that  could  be  applied  to  expense  application 
under  any  form  of  analysis,  but  under  this  form 
it  is  easily  apparent  that  the  totals  can  readily  be 
made  accurate  to  the  penny. 

The  indirectness  of  its  application,  the  constant 
pressure  for  its  increase,  inability  to  control  it  ex- 
cept by  extreme  watchfulness,  make  imagination 
to  visualize  expense  in  its  effect  and  final  result 
and  value  a  very  essential  element  for  executive 
use.  With  the  use,  however,  of  the  forms  of  ex- 
pense analysis  illustrated,  the  department,  from  the 
expense  point  of  view,  looms  up  clearly  with  its 
condition  shown  from  month  to  month  and  period 
to  period,  and  its  relation  to  the  productive  situa- 


THE  VEXING  QUESTION  OF  EXPENSE      117 

tion.  And  it  takes  a  hard-headed  imagination  to 
visualize  the  future  with  sufficient  confidence  to 
increase  expense  in  an  attempt  to  reduce  wastes 
and  labor  cost  of  operation.  Yet  to  double  ex- 
pense cost  per  hour,  if  labor  operation  cost  can  be 
cut  in  two,  is  to  reduce  cost,  not  to  mention  pos- 
sibilities of  waste  saving. 

Here,  then,  steps  in  the  practical  instinct  which, 
with  the  shrewd  use  of  imagination,  traces  the 
probable  effect  of  expense  action,  and  renders  the 
profitable  decision,  whether  it  be  to  spend  or  re- 
strict. 

Standards  are  somewhat  difficult  to  form  in  ex- 
penses, and  are  necessarily  varying  as  policies  and 
conditions  change.  They  can  and  should  be  made, 
however,  and  be  given  to  those  who  may  have  some 
control  of  expense. 

Comparisons  are,  of  course,  of  vital  necessity. 

Without  arrangement  no  executive  could  follow 
the  intricate  course  of  a  mass  of  expenses  and 
rightly  interpret  their  effects,  but  with  such  an 
arrangement  as  this  expense  analysis,  starting  with 
Form  19,  the  executive  can  pass  quickly  over  the 
whole  situation,  concentrating  his  attention  on  the 
departments  and  expenses  needing  it  most. 
Through  such  arrangement  the  alert  executive  can 
keep  very  close  touch  on  the  situation. 

In  the  matter  of  periodicity  expense  analysis 
may  be  made  weekly  at  the  close  of  the  payroll, 


118  COST    REPORTS    FOR    EXECUTIVES 

and  from  the  point  of  close  contact  with  it  and 
regularity,  there  are  advantages  in  this  period.  It 
will  ordinarily  be  shown  by  the  month  as  simpler 
to  make  up. 

Co-operation  of  the  executive  organization  finds 
no  better  field  for  action  than  in  studying  the  ex- 
pense analysis  and  assisting  in  the  effectiveness  of 
expense.  They  are,  indeed,  a  part  of  it,  and  much 
of  it  depends  on  their  force,  executive  ability,  and 
arrangement  of  affairs.  They  should  then  be  let 
into  its  secrets.  They  should  be  shown  its  effects 
and  results. 

It  may  be  said  finally  that  in  competitive  busi- 
nesses it  is  more  important  that  the  theories  of  ex- 
pense application  should  be  alike,  than  that  they 
should  be  exact,  except  in  totals,  and  under  any 
theory  it  is  essential  that  expense  include  every 
proper  item.  It  is  a  mistake  that  many  executives 
make  to  class  certain  items,  liable  to  quick  disap- 
pearance or  obsolescence,  as  assets.  While  it  may 
make  book  profit  appear  larger,  it  makes  actual 
profits  no  larger.  These  two  points  were  the  bases 
of  the  standard  cost  system  adopted  by  the  Na- 
tional Association  of  Machine  Tool  Builders,  which 
the  writer  devised. 

Expense  is  distinctly  the  tool  of  the  executive. 
Material  use  comes  naturally  from  the  design.  La- 
bor is  essential  in  all  cases  to  its  shaping.  But 
expense  is  the  instrument  with  which  the  executive 


sxecu1: 


Ect  Labor 

I 

i 

39 

1 

7 

> 

4 

1 
> 

21 
6 

Sa 

LES 

267 

int 
.ic 

1 
hly  5 
>n  in 

Date 
2/8/12 

n 

2/10/12 
2/13/12 


Item 


J.   Jones  &  Co. 

S.   Smith  &  Bro. 

i.    Dep 

Payroll 

3  Payrc 
its. 

S.    Simon  &   Son 

al 

B.  Brown  &  Co. 

S .    &   S .    Co. 

30.12 
L8.80 

Petty  Cash 

?  Pett- 

L.  Long  &  Co. 

Dairs  3 

B.  &  P.  Co. 

itione: 

Etc 


Totals , 


FORM  19— EXPENSE  ANALYSIS— EXECUTIVE'S  TOTALS 


April  1912—4  Weeks 

Direct  Labor  Expense 

Month  Period  Month 


%  Expends 

Month   Period 


Direct  Labor 

Period 


May  1912 — 4  Weeks 

Expense 

.Month  Pi 


.CENSE 

Moni  H   Period 


8,160.00 


1,459.13 


31,353.43 


5,890.00 


849.19 

3,264.00 

4,642.00       i       17,190.00 

1,208.68 

5,009.43 

10,911.52 

1,945.30 
398.14 

2,911.03 
343.00 

5,314.05 


35,171.83 

6,705.76 
1,470.00 
9,995.06 
1,250.18 
15,750.83 


Sales  Selling  Expense 

65,635.63        207,966.48  5,907.20  17,777.12 


133 
47 
63 
28 
65 


112 

114 
45 
58 
25 
50 


7,969.13 


39,322.56 


1,370.48  7,260.48 

902.  4,166.00 

4,340.00  21,530.00 

1,356.65  6,366.08 


59,654.80 


267,621.28 


6,367.15 

1,284.33 
199.83 
769.98 
343.78 

3,769.23 


41,538.98 

7,990.09 

1,669.83 

10,765.00 


1,593.96     25 
19,520.06     47 


110 
40 
50 
25 
49 


Selling  Expense  Per  Cent. 

4,708.02      22,480.14    7.9  8.4 


NOTE. — This  form  shows  merely  the  final  totals  of  labor  and  expense,  monthly  and  in  periods,  in  all  departments,  and 
their  relations,  so  that  the  executive  may  see  just  the  general  situation  in  the  plant  and  start  investigation  for 
further  detail  where  points  of  weakness  show. 


2/8/12 

2/10/12 
2/13/12 


Item 


Vocch'r 
No. 


J.  Jones  &  Co. 
S.  Smith  &  Bro. 
Payroll 

S.  Simon  &  Son 
B.  Brown  &  Co. 
S.  &  S. 
Petty  Cash 
L.  Long  &  Co. 
B.  4  P.  Co. 

Etc. 


00 
01 
02 
03 
04 
05 
06 
07 
08 


47 
48 

49 


Amount 


249.18 

1,200.00 

6,352.74 

802.13 

260.59 

318.92 

65.19 

182.96 

212.16 


FORM  20— VOUCHER  REGISTER 

ExPEN 


249.18       Class  X 


Class   XXX 


Direct  Labor 


4,892.12 


Permanent 

Assets 


10,216.95        2,042.18 


1,460.62 
802.13 

318.92 

65.19 

182.96 

212.16 


1,200.00 


4,892.12      2,082.65      1,200.00 


Explanation 


Men.  Dept.  2 

See  Payroll  for  detail  by  depart- 
ments.  Indirect  Labor  1,460.62 


$200.12  outgoing  freight 
S118.80  incoming  freight 

See  Petty  Cash  Book 
Repairs  No.  82  Mch. 
Stationery 

Etc. 


NOTE.  This  is  simply  a  form  of  day 
book  where  all  expenditures  may  be 
recorded  and  divided  into  the  four 
main  classes — Material,  Labor,  Ex- 
pense and  Permanent  Assets — with 
columns  to  render  such  explanation 
as  may  be  necessary  for  further  de- 
tailed analysis. 


i 


"> 


Explanation 


t.  2 

)11  for  detail  by  depart- 
Indirect  Labor  1,460.62 


outgoing  freight 
incoming  freight 

/  Cash  Book 
tfo.  82  Mch. 

^y 


NOTE.  This  is  simply  a  form  of  day 
book  where  all  expenditures  may  be 
recorded  and  divided  into  the  four 
main  classes — Material,  Labor,  Ex- 
pense and  Permanent  Assets — with 
columns  to  render  such  explanation 
as  may  be  necessary  for  further  de- 
tailed analysis. 


THE  VEXING  QUESTION  OF  EXPENSE      119 

shapes  his  factory  course,  his  weapon  in  fighting 
the  battle  of  profit.  There  are  rules  for  its  use, 
but  they  are  not  readily  discernible  except  by  ex- 
periment, nor  readily  workable  except  with  the  use 
of  thought,  patience  and  persistence.  Closeness  in 
expenditure,  low  expense  ratio,  may,  according  to 
circumstances,  mean  eventual  dry-rot  or  safe  profit. 
Liberality  in  expense  may,  according  to  the  condi- 
tions of  it,  mean  eventual  ruin,  or  increase  of 
profits.  There  is  always  a  certain  amount  of  ex- 
pense that  is  absolutely  necessary  to  the  existence 
of  the  factory  organization,  and  it  is  true  that  any 
other  item  of  expense  is  wisely  added  when  it  ful- 
fils a  definite  purpose  that  leads  to  an  economy 
eventually  greater  than  the  expenditure;  and  a 
clear  knowledge  of  expense  and  its  relation  to  pro- 
duction is  essential  to  such  calculation. 


STATISTICS  AS  AN  AID 


CHAPTER   VII 

STATISTICS  AS   AN  AID 

TN  the  study  of  the  progress  of  the  manufactur- 
*  ing  situation  through  figures,  it  is  not  suffi- 
cient that  the  executive  give  consideration  only  to 
the  bare  costs  of  articles,  or  to  the  showings  of  ma- 
terial, labor,  and  expense  conditions  alone;  for 
these  figures,  valuable  as  they  are,  are  merely  re- 
flections of  conditions  into  which  enter  yet  other 
elements  very  vital  to  ultimate  welfare.  Without 
a  proper  knowledge  of  these  elements  and  their 
variations,  the  progress  and  possibilities  of  the  situ- 
ation are  not  well  brought  out,  and  policies  of  oper- 
ation looking  towards  the  future  (for  the  wise  ex- 
ecutive thinks  always  for  the  future,  realizing  how 
swiftly  it  merges  into  the  present)  are  not  well 
founded  on  the  facts,  or  frequently  are  not  even 
suggested. 

A  cost  system  must  then  be  buttressed  with  sta- 
tistics. These  statistics  should  be  preferably  a  part 
of  the  cost-department's  work,  since  they  interlace 
with  and  support  the  cost  system,  and,  in  fact, 
have  to  do  with  facts  frequently  already  a  part 
of  the  cost  situation,  but  in  connections  and  guises 
different  from  those  which,  in  the  form  of  separate 

123 


124  COST    REPORTS    FOR    EXECUTIVES 

statistics  (for  costs  are  merely  statistics  remod- 
eled), are  necessary  to  show  their  value  and  rela- 
tion to  the  moving  situation.  Many  plants,  of 
course,  have  certain  statistics,  even  when  they  have 
not  costs,  but  such  statistics  can  not  render  the 
most  complete  values. 

There  need  be  no  lengthy  arguments  advanced 
as  to  the  value  of  statistics.  They  are  simply  es- 
sential as  a  presentation  of  running  facts  illumi- 
nating conditions  for  the  enlightenment  of  the  ex- 
ecutive, so  that  his  judgment  and  energy  may  be 
guided  by  certain  knowledge.  Too  often,  without 
them,  impressions  based  on  isolated  occurrences 
which  are  not  representative  tend  to  lead  the  ex- 
ecutive astray.  With  them  the  course  may  not  al- 
ways be  clear,  but  it  is  much  easier  to  steer. 

Nor  are  there  any  theories  of  presentation,  ex- 
cept those  dictated  by  common-sense,  as  to  show- 
ing the  facts  so  that  they  will  make  the  situation 
quickly  clear.  Of  course  the  principles  of  the  cost 
philosophy  apply  here.  Accuracy,  standards,  com- 
parisons, arrangement,  periodicity,  as  previously 
explained,  are  plainly  essentials  to  statistics  of 
value.  Imagination,  practical  instinct  and  co-op- 
eration of  the  executive  organization  will  be  found 
to  be  vital  necessities  in  the  attainment  of  results 
of  maximum  value  through  statistics.  The  discus- 
sion on  statistics  becomes,  then,  almost  a  simple 
recital  of  facts  to  be  illustrated. 


STATISTICS   AS    AN    AID  125 

The  first  important  series  of  progressive  facts 
marshalled  under  the  head  of  statistics  should  have 
to  do  with  the  selling  situation.  From  the  statis- 
tical point  of  view  there  are  three  conditions  to 
be  considered  in  their  relations  to  each  other — the 
volume  of  sales  of  salable  articles,  the  market,  and 
the  means  of  connecting  them. 

It  is  not  the  scope  of  this  chapter  to  deal  with 
particular  methods  of  selling  or  of  getting  results  in 
this  vitally  important  department  of  manufactur- 
ing plants,  except  to  point  out  that  from  statistics 
and  their  study  naturally  will  flow  suggestions  of 
desirable  or  necessary  policies,  through  indications 
of  tendencies  shown  toward  either  good  or  poor  re- 
sults ;  and  that,  likewise,  on  the  opposite  hand,  sta- 
tistics will  show  what  are  the  results  of  certain 
practical  plans  and  methods. 

The  statistics  of  articles  from  the  selling  point 
of  view  have  to  do,  in  very  many  plants,  not  merely 
with  the  details  of  shipments,  but  frequently  more 
importantly  with  the  details  of  orders  as  they  ar- 
rive. In  many  cases  shipments  are  seasonable  but 
orders  must  be  taken  well  in  advance,  and  the  vol- 
ume and  significance  must  be  known  continuously 
so  that  proper  and  economical  manufacturing  ar- 
rangements may  be  made.  In  other  cases  these 
facts  must  gauge  the  question  of  volume  of  stock 
to  be  made  up  and  carried.  But,  more  significant- 
ly from  the  strictly  selling  point  of  view,  it  is  im- 


126  COST    REPORTS    FOR    EXECUTIVES 

portant  to  know  the  ratio  of  low-profit  and  high- 
profit  goods  sold  (for  every  factory  has  the  two 
classes),  the  ratios  of  different  grades,  sizes,  etc., 
of  the  same  article  as  sold,  and,  especially  and  par- 
ticularly, the  progress  of  sales  of  the  different  lines 
over  definite,  active  periods  as  compared  with  sim- 
ilar previous  periods,  for  these  facts  gauge  the  mar- 
ket conditions  and  the  value  of  means  of  connect- 
ing with  the  market,  which  knowledge  is  very  es- 
sential. 

Generally  speaking,  then,  there  should  be  de- 
tailed statistics  showing  volume  of  orders  on  hand 
of  different  articles,  which  can  readily  be  kept  up 
daily  or  weekly  by  adding  orders  and  subtracting 
shipments;  which  record  will  permit  economic  an- 
ticipation and  arrangement  of  the  manufacturing 
situation.  Likewise  there  should  be  detailed  pe- 
riod records  of  sales  of  different  articles,  compar- 
able always  with  the  records  of  previous  similar 
periods,  in  order  to  show  their  progress  backward 
or  forward.  Forms  21  and  22  illustrate  such  meth- 
ods. It  must  be  understood,  however,  that  in  each 
business  its  own  peculiarities  must  be  met  and  the 
forms  illustrated  can  only  furnish  general  ideas. 
From  such  a  form  as  Form  21  it  is  plain  that  a 
constant  knowledge  of  the  necessities  of  production 
is  to  be  had,  and  this  form,  of  course,  can  be  varied 
to  give  this  knowledge  over  any  period,  or  for  pres- 
ent and  future  orders.     Given  the  knowledge  of 


Approximate 
Per  Cent.  Profit 


Article 


ed  sto 
Item 
ases  wj 


FORM  2i—  ORDERS— PRODUCTION  SHEET 

{ 

•Week  of    5/4/12 

WEEK  O,     5 

Week  of     5/18/12 

Article 

On  Hand 

Oeders 

Production 

On  Hand 

Orders 

Production 

On  Hand 

A. 

2,082  gross 

10,118 

8,260 

224 

11,250 

B. 

76        "     ] 

1,500 

[3,176] 

3,200 

'2.508 

C 

24,126    dos. 

12,260 

15,960 

27, 

16,260 

D 

E 

526 

100 

300 
5 

350 
0 

576       . 

80 

0 

496 
85 

95 

10 

0 

F. 

Etc. 

82,327      " 

.118 

72,116 

97, 

65,000 

62,918 

Etc. 

jrm  si 
orders  are  for  futi 
are  greater 

:ers  on 
ire  delivery  a 
ock  made  up. 

trine 

nd  stock  is    t 
This  method    i 

lation  to  Finished  stock.     This  method  is  particularly  applicacia  where 
o  be  made  to  fill  them.      Items  in  brackets  indicate  the  situation  where  orders 
cases  where  orders   are  liable  to   exceed  production. 

Appboxima 
Per  Cent.  Pi 


FORM  22— SALES  RECORD 


Month 
April 


Period 
to  Date 


Month 

May 


Period 
to  Date 


Period 


$2,08?.   »5         19,626.12 
1,816.17 


15,612.21 

1,230.09 

510.19 

59,387.16 


=— + 
$3,187.13      $12,813.25 


Period 


Month 


617.90 

320.05 

16.916.20 


2,433.07 
18,824.93 

1,550.14 

597.31 

76,303.36 


:'orm  shows  a  simple  method  of  sal  n,  monthly  and  in  peri  3how 

the  progress  of  all  lines.      The  approximate  prof i 

luis  for  Judgment  as  to  prop  i.hem. 


^ 


HC'der  to  show 
it  rate 


STATISTICS    AS    AN    AID  127 

productive  ability  in  the  plant,  this  form,  especially 
adaptable  in  the  shown  conditions  to  staple  articles, 
becomes  a  definite  forecast. 

Form  22,  if  the  figures  are  compared  with  the 
figures  of  similar  previous  periods,  and  if  some 
mark  is  attached  to  show  percentages  of  profit  on 
the  different  articles,  becomes  very  essential  in  the 
struggle  to  keep  the  most  profitable  articles  to  the 
front. 

In  the  matter  of  markets,  proper  statistics  will 
show  where  the  sales  are  made  according  to  teiri- 
tories,  and,  in  a  varied  line,  even  according  to  cus- 
tomers. These  facts,  together  with  some  study  of 
population  and  conditions  of  sections,  show  readily 
the  proper  points  of  attack  and  contact  and  bring 
about  the  increasing  of  lines,  both  in  variety  and 
quality,  with  customers  already  made.  Forms  23 
and  24  illustrate  possible  methods.  Form  23  gives 
merely  the  viewpoint  of  locality  of  sales,  and  may 
be  put  into  as  much  detail  of  territory  and  articles 
as  desired.  Form  24  shows  possibility  of  analyz- 
ing customers'  sales  and  comparing  them  with  pre- 
vious periods.  It  will  be  understood,  of  course, 
that  none  of  these  forms  are  offered  for  copy,  but 
merely  to  suggest  possibilities  in  different  direc- 
tions, in  the  simplest  way. 

The  third  point  of  value,  then,  in  sales  statistics 
arises  in  a  study  of  the  means  of  connection  be- 
tween the  article  and  the  market.     This,  in  very 


128    COST  REPORTS  FOR  EXECUTIVES 

many  cases,  will  mean  a  study  of  the  results  from 
salesmen.  An  executive,  naturally,  for  judgment 
as  to  value,  desires  to  know  the  relation  of  the 
sales  by  a  salesman  to  his  salary  and  expenses,  but 
with  a  proper  cost  system  he  should  and  can  pref- 
erably know  the  relation  of  the  profits  on  the  sale 
to  the  cost  of  obtaining  them,  because,  frequently, 
the  salesman  with  the  low  percentage  of  cost  to  the 
sales  may  have  a  high  percentage  of  cost  to  the 
profit  on  the  sales,  due  to  selling  principally  low- 
profit  goods,  or  of  constant  concessions  in  price. 
The  plant  with  a  good  selling  force  has  made  a 
long  step  toward  prosperity,  and  a  good  sales  force 
is  only  exceptionally  built  without  a  basis  of  the 
facts.  Form  25  illustrates  a  method  of  observing 
salesmen's  results. 

The  value  of  advertising,  while  it  may  not  be 
always  definitely  measured,  should  be  shown  by 
statistics  giving  the  relation  of  advertising  cost  to 
the  sale  of  the  articles  advertised  and  its  effect  in 
districts,  where  possible. 

Such  statistics  of  selling,  to  which  may  be  added 
others  suggested  by  circumstances  or  the  peculiar- 
ities of  business,  will  keep  the  whole  situation  plain 
as  to  its  tendency,  will  keep  the  force  keyed  up  to 
constantly  bettering  the  results,  and  will  lead  to 
policies  and  plans  for  improved  results. 

The  next  important  use  for  statistics  has  to  do 
with  production.     It  is  hardly  needful  to  repeat 


FORM  25— SALESMEN'S  SHOW! 


N 
a 

d 

MonthA 

pril 

Of 

Sales 

Profit 

f.4 

Month 

1,012.12 

91.8 

t 

0 

Period 

4,629.20 

41< 

0 
b 

B 

Month 

300.16 

60.0 

Period 

1,213.87 

242.  7i 

C 

Month 

2,500.10 

375.0 

Period 

9,000. 

1,350.0 

D 

Month 

187.90 

46.9 

Period 

512.69 

!8.1 

E 

Month 

5.12 

2.0 

Period 

102.18 

4< 

F 

Month 

8,612.91 

1,033.5 

M 

Period 

32,650.52 

.918.0 

s 
t 

Totals,  Month 

12,618.31 

1,609.4 

t 

1 

48,108.72 

6,096.4 

0 
1 

Sal.  and  Exp.,  Month 
"                  "     Period  . 

502.2 

2,082.1 

Per  Cent,  to  Profits. 

it                                 « 

Month 

31 

Period 

34 

NOTE.      Form  23  indicates 
a  simple  method  of  showing 
division  of  sales  by  sec- 
tions of  the  country,   in 
order  to  show  weakness  in 
certain  sections  or  possi- 
bilities therein. 

FORM  23— SALES  BY  SECTIONS 

Section 

January 

Februabt 

Makch                Apbil 

New  Enaland  . 
New  York. 

$1,218.90 

13,216.51 

4,221.63 

$1,326.20 

$1,561 

27 

$1,819.16 
12,812.19 

13,528.19 

13,018.17 

Chicago   .... 
South    

5,320.17 
620.82 

3,690.12 
732.16 

3,218.70 

450.19 

691.17 

Totals 

FORM  24-CUSTOMER'S  SALES-         John  Jones  &  Co.  f  chioago 

NOTE.      Form  24  offers  a 
simple  method  of  showing 
the  relations  with  a  cus- 
tomer as  to  different 
lines  of  goods,   as  a  means 
of  development  of  all 
lines  with  him. 

Month 

A 

B 

C 

D 

Etc. 

Totals 

February 

|326 

|28 

128 

56 

$412 

$6 

$1,112 

518 

107 

618 

10 

1,326 

729 

40 

1,016 

812 

210 

926 

0 

Etc.         1,420 

125                  15 

1,125 

0 

602 

Etc.             Etc. 

Etc. 

Etc. 

Etc. 

July 

Etc. 

Etc. 

Totuls 

|5,621 

|1,108 

$6,401 

$180 

Etc. 

$14,201 

Dollars   only  used.      Cents  not  noted.                          _^ 

FORM  25— SALESMEN'S  SHOWING 
MouTHApril 


D 


Totals,  Month 

"        Period 

Sal.  and  Exp.,  Month 
"     Period. 


Month 
Period 


Month 
Period 


Month 
Period 


Month 
Period 


Month 
Period 


Month 

Period 


Per  Cent,  to  Profits  . 


1,012.12 
4,629.20 


300.16 
1,213.87 


2,500.10 
9,000.20 


187.90 


5.12 
102.18 


8,612.91 
32,650.52 


12,618.31 
48,108.72 


Month 

Period 


. 


Month  May 
Sales 


91. 

410. 


80 


,062.19 


60, 
242. 


375, 
1,350, 


46, 

128. 


1,033. 
3,918, 


54 


1,609, 

6,096, 

502. 

2,082, 


417.26 
,631. 13 


200.16 

200.42 


120.19 
032.88 


6.20 
108.38 


200.12 

850.64 


31 
34 


006.12 
114.84 


185.59 
002.20 


83.45 


330.02 
,080.08 


30.05 
158.21 


2.48 
43.32 


1,104.00 


735.59 
832.01 


532.19 
,624.35 


NOTE.      This  form  affords 
a  simple  method  of  making 
:lear  a  salesman's  value 
The  vital  elements  are  a 
showing  of  his  sales  on 
different   lines,    the 
profits  he  obtains,  and  his 
salary  and  expenses  in 
relation  to  the  profits, 
to  the  sales  where  profits 
are  not  worked  out. 


30.7 
33.5 


:ng 


Month  May 


Sales 

—  '   •= 

0  2,062.19 

1  | 6,691.59 


417.26 
1,631.13 


Profit 

185.59 
602.20 


2,200.16 
11,200, 


120.19 


632.83 


6.20 
108.38 


9,200.12 

(41,850.64 


83.45 
326.20 


330.02 

1,680.08 


30.05 


158.21 


2.48 
43.32 


14,006.12 


62,114.84 


8 


1,104.00 
5  ,022.00 


1,735.59 


7,832.01 


532.19 


2,624.35 


30.7 

33.5 


NOTE.  This  form  affords 
a  simple  method  of  making 
clear  a  salesman's  value 


The  vital  elements  are  a 
showing  of  his  sales  on 
different  lines,  the 
profits  he  obtains,  and  1 
salary  and  expenses  in 
relation  to  the  profits, 
to  the  sales  where  profit 
are  not  worked  out. 


STATISTICS    AS    AN    AID  129 

that  because  of  possibilities  of  cost  reduction  in 
labor  and  expense,  the  struggle  in  every  factory  is 
to  get  the  maximum  production  in  given  units  of 
time — from  men,  machines,  departments,  and  the 
factory.  This  struggle,  to  be  maintained,  requires 
the  constant  trail  of  comparative  statistics. 

There  is,  of  course,  an  art,  a  trick  of  swift  and 
clear  illustration  in  statistical  showing.  It  is  neither 
possible  nor  desirable  to  keep  great  detail  of  pro- 
duction at  every  point,  but  total  of  articles  in  given 
periods  (sometimes  in  units  of  weight  or  quantity, 
and  sometimes  in  value)  can  be  kept  constantly 
with  the  idea  of  analysis  downward,  when  desired. 
And  most  particularly  is  it  valuable  if  the  "squeeze 
point"  or  point  of  most  difficult  production  be 
found,  and  the  record  of  progress  there  be  kept. 
With  such  statistics  of  production  it  is  frequently 
necessary  to  show,  also,  certain  facts  of  essential 
connection,  as  speeds  of  machines,  temperatures, 
weather  conditions,  etc.,  to  explain  them  and  their 
variations. 

Of  course,  a  very  vital  point,  not  to  be  passed  by, 
is  the  relation  of  production  to  the  running  sales, 
in  connection  with  the  stock  on  hand,  in  order  that 
proper  plans  for  the  future  may  be  considered,  and 
in  order  that  neither  may  the  sales  run  far  ahead 
of  the  production,  causing  complaints  of  delay  and 
cancellation,  or  the  production  much  exceed  sales, 
causing  an  expensive  and  dangerous  piling  up  of 


130     COST  REPORTS  FOR  EXECUTIVES 

stock.  Statistics  of  manufactured  goods  unsold, 
on  hand,  almost  always  amply  pay  for  their  cost  of 
up-keep.  There  are  in  mind  several  important 
concerns,  which,  on  account  of  the  former  difficulty 
(due  wholly,  not  to  a  lack  of  statistics,  but  of  il- 
luminating statistics),  lost  much  trade;  and  at  least 
two  concerns,  which,  because  of  the  latter  difficulty, 
found  themselves  compelled  to  assign.  In  the  case 
of  these  concerns  the  proper  statistics  would  have 
been  worth  thousands  of  dollars.  Form  21,  already 
referred  to,  illustrates  a  simple  method  for  plants 
of  some  kinds. 

The  statistics  of  sales  and  production,  and,  of 
course,  of  consequent  completion  of  sales  by  ship- 
ment, together  with  the  cost  method  indicated  in 
previous  articles,  including  the  statistics  of  waste, 
labor  operations,  and  expenses  there  shown,  cover 
fairly  completely  the  main  situations,  in  the  light 
of  fact  illustration.  There  are,  however,  as  every 
inquisitive  and  investigating  executive  will  dis- 
cover, innumerable  other  desirable  points  of  knowl- 
edge, which  seem  to  demand  illumination  through 
statistics.  Almost  every  detail  of  manufacture 
seems  to  be  susceptible  of  further  enlightenment. 
But  the  wise  executive,  before  covering  too  mi- 
nutely the  manufacturing  situation  with  statistics, 
will  consider  the  possible  values  to  be  obtained,  the 
time  of  what  people  can  be  properly  put  into  con- 
sideration of  such  facts,  and  the  cost  of  obtaining 


STATISTICS    AS    AN    AID  131 

them.  Where  a  probable  real  value  is  to  be  ob- 
tained, it  would  not  be  wise,  of  course,  to  pass  over 
too  quickly  any  investigations.  But  it  must  be  re- 
membered that,  however  beautiful  the  theory  and 
thought  that  every  situation  is  made  clear  by  com- 
pilations of  facts,  nevertheless  it  is  often  fully  as 
great  an  economic  folly  to  be  overburdened  with 
facts  to  be  studied  and  assimilated,  as  it  is  to  de- 
pend on  judgment  and  watchfulness  alone  unil- 
lumined  by  a  systematic  trail  of  fact-pictures. 

It  is  often  valuable  to  plot  the  statistics  into 
curves,  particularly  as  showing  tendencies  or  rela- 
tions of  several  factors  over  continued  periods.  In 
general,  however,  such  curves  can  show  only  ten- 
dencies, and  they  are  mainly  valuable  to  the  execu- 
tive who  may  desire  to  use  them  to  make  plain  the 
situation  to  others  above  or  below  him.  Generally 
he,  himself,  will  follow  the  figures. 

A  wise  method  to  pursue  always  in  designing 
statistics  is  to  start  with  general  compilations  cov- 
ering the  larger  situation,  and  only  go  further  into 
details  as  the  situation  seems  to  demand.  Thus  the 
executive  can  generally  study  each  situation  from 
the  large  point  of  view,  and  his  judgment  in  dig- 
ging deeper  will  be  guided  purely  by  the  apparent 
necessities  of  each  situation  rather  than  by  the  mere 
desire  to  compile  statistics. 

There  is  illustrated  in  Form  26  a  combination 
set  of  statistics  and  costs  called  the  "Weekly  Cost 


132     COST  REPORTS  FOR  EXECUTIVES 

and  History."  As  will  be  seen,  this  form  illus- 
trates the  whole  progress  of  a  department  in  labor, 
expense,  production,  and  waste  for  week  after 
week  comparatively.  It  is  not  advised  for  all 
plants,  nor  as  the  best  method  to  be  operated  con- 
tinuously for  any  one  plant,  but  as  a  method  of 
getting  a  department  into  good  shape  and  under 
control  it  has  been  found  a  simple  and  valuable 
method.  The  facts  shown,  of  course,  may  be  varied 
to  suit  the  situation  and  the  desires  of  the  execu- 
tive. 

No  executive  can  afford  to  spend  the  larger  part 
of  his  time  studying  statistics,  but  it  is  only  the 
common-sense  of  his  duty  to  review  the  different 
sections  of  his  factory  situation  periodically,  with 
the  idea  of  assuring  himself  of  their  progress  ac- 
cording to  plan,  or  of  planning  future  steps  of 
progress;  and  that  executive  who  believes  in  his 
own  ability  or  that  of  his  subordinates  to  do  these 
things  purely  on  their  impressions  or  judgment  is 
taking  a  long  chance  on  his  plant's  success.  Since 
so  much  of  success  depends  on  human  effort,  it  is 
never  amiss,  but  always  well,  to  judge  of  future 
possibilities  by  past  records,  and  statistics  lend  this 
opportunity. 


ID  I 
6/] 

,22. 
23. 

• 

!58. 
20. 

2. 
.18. 
15. 
55. 
47. 
4,8 

53 
.1,  2 

2,4 
6 

1 

eek 

ex 

itho 

• 

DErT.   3 

Item  Week  5/18/12    Peeiod  to  Date       Week    5/25 

Labor 

Direct— Piece  Work    $125.60 

"        Da?  Work 2?    5Q 

Average  Cost  per  Hundred 244 

Expense  317.93 

Indirect  Labor 20.50 

Supplies  10.12 

Powcr 107.16 

RePairs   42.96 

Depreciation,  etc __    nn 

Miscellaneous 00    i  q 

Direct  Hours _    ,  __ 

5 ,  lOo 

Expense  Cost  per  Hour,  Cents „ 

Phoduction 

62,800 
Average  Total  Cost  per  Hundred, 

Labor  and  Expense .  75 

Waste 

Amount  Seconds =    024 

Amount  Waste 642 

Per  Cent.  Seconds 3 

Per  Cent.  Waste 1 


FORM  26— WEEKLY  COST  AND  HISTORY 


32,335.39 

494.00 

.242 

6,019.41 

220.00 

57.96 

2,086.78 

397.78 

1,100.00 

2,156.89 

123,604 

48.7 

1,167,696 

.757 


58,380 

7,000 

5 

0.6 


1129.92 

32.50 

.25 

198.82 

21.50 

3.08 

109.12 

0 

55.00 

10.12 

5,414 

36.7 

64,960 

.55 

3,897 
454 


Period  to  Date    Week  6/1 


0.7 


$2,565.31 

526.50 

242 

6,218.23 

241.50 

61.04 

2,195.90 

397.78 

1,155.00 

2,167.01 

129,018 

48.2 

1,232,656 

.746 

62,277 

7,454 

5 

0.6 


$122.58 

23.50 

.238 

258.22 

20.50 

2.16 

118.22 

15.18 

55.00 

47.16 

4,832 

53.4 

61,218 

.66 

2,448 

672 

4 

1.1 


Period  to  Date 

32,589.74 

550.00 

.242 

6,476.45 

262.00 

63.20 

2,314.12 

412.96 

1,210.00 

2,214.17 

134,850 

48.1 

1,294,874 

.74 

64,725 

8,126 

5 

0.6 


NOTE.  The  cost  and  history  affords,  a  method  of  showing  weekly  the  progress  of  each  or  all  departments  of  a  plant.  The 
idea  as  illustrated  is  to  show  the  main  elements  of  labor,  expense,  production,  and  waste,  and  their  fluctuations,  with 
the  idea  of  getting  the  department  under  control.   This  method  is  valuable  mainly  where  staple  production  takes  place. 


c 


COST  SYSTEM— THE  BASIC  IMPROVE- 
MENT 


CHAPTER   VIII 

COST   SYSTEM— THE   BASIC   IMPROVEMENT 

rilHAT  the  future  of  the  cost  system  is  to  be 
*•  one  of  universal  and  valuable  employment, 
and  of  higher  and  more  practical  development,  is 
assured  by  many  growing  necessities,  not  only  in- 
timate to  the  individual  plant  and  its  proper  man- 
agement, but  requisite  as  well  to  the  common  wel- 
fare in  the  advancement  of  industrial  development 
and  its  economic  aid  and  control  by  law,  which  lat- 
ter it  seems  business  is  not  to  escape. 

If,  for  example,  our  tariff  is  to  be  adjusted  sci- 
entifically on  a  basis  of  actual  costs,  as  attempted 
by  the  late  Tariff  Commission,  it  is,  in  fairness  to 
all,  essential  that  there  be  in  existence  not  merely 
general  figures  giving  unit  cost  on  bulk  production, 
but  complete  costs  in  various  like  plants,  uniform 
in  method  and  discriminating  as  to  grades  and 
qualities.  Not  for  long  can  certain  general  expen- 
ditures, averaged  over  total  production,  serve  a 
final  and  just  purpose. 

Then  there  is  a  continuous  outcry  against  the 
high  cost  of  living,  and  there  grows  a  public  sus- 
picion that  this  exists  not  merely  because  of  a 
depreciation  of  gold  and  advancing  wages,  but  be- 

135 


136    COST  REPORTS  FOR  EXECUTIVES 

cause  of  undue  profits  on  the  part  of  capital,  and 
such  ideas  as  the  Government  control  of  prices  are 
seriously  advanced.  Yet  prices  could  never  be 
justly  controlled,  nor  indeed  an  investigation  ren- 
der a  properly  reasonable  basis  for  action,  until  a 
fair  number  of  like  plants  have  discriminating  and 
uniform  cost  systems.  And  certainly  no  such  con- 
dition exists  at  the  present  time  in  any  large  pro- 
portion of  the  different  classes  of  manufacture, 
though  concerted  action  by  associations  of  manu- 
facturers is  tending  to  bring  this  about. 

If,  then,  the  Government  is  to  regulate  matters 
that  have  to  do  with  prices  and  profits,  it  would 
seem  that  it  must  likewise  assume  the  responsibility 
of  forming  a  proper  basis  of  knowledge  for  such 
action.  This,  of  course,  opens  up  a  wide  problem 
with  which  the  Government  is  not  entirely  un- 
familiar since  its  work  with  railroad  accounting, 
but  which  it  has  not  been  able  to  solve  successfully 
as  yet  in  its  own  departmental  affairs,  according 
to  the  President's  message  to  Congress  on  Econ- 
omy and  Efficiency  in  Government  Service. 

It  has  been  suggested  in  another  connection  that 
a  Government  bureau  might  render  valuable  aid  to 
our  manufacturing  industries  by  studying  their 
problems  in  some  detail,  as  it  has  those  of  the  agri- 
cultural industry,  in  which  case  there  might  be  a 
reversal  of  the  opinion  held  today  by  many  manu- 
facturers— that  the  Government  is  too  busy  telling 


THE    BASIC    IMPROVEMENT  137 

them  what  they  can  not  do  to  give  any  valuable 
information  as  to  what  they  may,  with  profit,  do. 
To  one  who  has  studied  costs  and  their  value, 
and  seen  the  practice  active  and  effective  in  control 
when  properly  operated  (though  widely  variant  in 
principles  and  methods  of  application)  and  who 
has  reflected  on  the  tremendous  and  growing  ram- 
ifications and  difficulties  of  this  great  industrial 
era,  the  value  (and  indeed  the  necessity)  of  con- 
trol, and  the  necessity  of  basing  remedial  action 
on  the  real  facts  of  the  situation,  it  would  seem 
that  a  Government  Bureau  of  Industrial  Research 
might  render  substantial  values.  Its  problems 
would  be  large,  and  diplomatic  as  well  as  practi- 
cal, since  manufacturers  have  ways  of  their  own  to 
which  they  are  much  attached,  and  are  slow  to  ab- 
sorb the  methods  of  others  no  matter  how  alluring 
in  the  recital.  But  its  first  work  must  essentially 
be  the  study,  devising,  and  publication  of  practical 
and  discriminating  cost  systems  for  various  classes 
of  manufacture,  since  all  other  experiments  must 
meet  the  test  of  comparative  costs.  And  the  pub- 
licity of  any  investigations  it  might  be  authorized  to 
make,  when  these  were  based  on  a  pre-established 
method,  would  go  far  toward  showing  remedies  for 
situations  now  very  puzzling.  In  any  case,  it  is 
entirely  logical  that  much  economic  business  law  of 
future  construction  must  have  a  basis  of  proper 
costs.    The  wise  executive  will  prepare  himself  for 


138    COST  REPORTS  FOR  EXECUTIVES 

this,  and  it  is  not  an  entirely  disquieting  thought 
for  him,  that  if  such  laws  may  seem  to  hamper 
him,  they  will  likewise  hamper  his  competitors  and 
render  him  equal  justice  with  them. 

But  apart  from  any  such  ideas,  the  value  to  the 
individual  plant  of  the  right  and  practical  cost 
system  is  an  ample  compensation  for  its  careful  and 
detailed  employment. 

It  might  appear  valuable  here  to  give  some  idea 
of  what  is  a  right  and  practical  cost  system  (for 
its  development  is  somewhat  modern,  and  its  im- 
portance even  more  so)  on  account  of  its  value  in 
the  introduction  of  modern  methods  of  manage- 
ment. 

Accounting,  since  the  introduction  of  the  double- 
entry  book-keeping  system,  has  reached  a  high 
state  of  development  in  rendering  exact  account  of 
receipts  and  expenditures  of  a  business.  In  its 
most  universal  practice,  it  has  to  do  with  the  pay- 
ments of  bills  for  whatever  purpose,  with  the  ac- 
cumulation into  certain  general  or  desired  classi- 
fications of  amounts  of  expenditure  covering  the 
total  over  given  periods,  and  with  the  billing  and 
record  of  all  items  of  sale,  and  their  classifications. 
It  has  to  do  with  the  changing  records  of  assets 
and  liabilities,  and,  through  periodical  actual  in- 
ventories, with  the  showing  of  gross  and  net  profits. 
It  has  to  do  with  a  proper  showing  of  the  debts  of 
the  business  and  the  amounts  owing  to  it.    It  has 


THE    BASIC    IMPROVEMENT  139 

to  do  with  credits,  finances,  bank  relations,  notes, 
drafts,  etc.  In  fact,  it  has  developed  into  a  com- 
plete showing  of  the  business  in  its  relation  to 
other  businesses  in  detail,  and  only  a  general  show- 
ing of  the  internal  operations  under  certain  heads 
with  a  periodical  net  result. 

In  the  profession  of  accountancy  there  has  been 
developed  an  expert  body  of  accountants  and  book- 
keepers, to  whom  is  entrusted  much  in  confidence, 
and  whose  work  develops  or  demands  a  certain 
temperament. 

The  cost  system  takes  hold  where  accounting 
leaves  off.  It  has  in  common  with  accounting  only 
two  things — the  use  of  the  same  set  of  figures  of 
expenditure,  and  the  value  of  the  accounting  as 
a  means  of  proof.  It  deals  with  internal  affairs 
only,  in  contradistinction  to  accounting's  dealing 
with  external  affairs.  Accounting  and  costs  are 
complements  in  a  showing  of  the  operation  of  a 
business. 

In  its  dealings  with  the  internal  affairs  of  the 
business,  the  cost  system,  to  be  right  and  practi- 
cal, must  not  merely  present  fairly  true  and  proved 
costs  of  all  articles  produced  (which  has  long  been 
considered  the  chief  if  not  indeed  the  only  use  of 
a  cost  system),  but  it  must  present  constantly  and 
comparatively  pictures  of  the  progress  of  certain 
sections  of  the  business,  showings  of  the  divisions 
and  departments,  wastes,  variations  from  the  stand- 


140  COST    REPORTS    FOR    EXECUTIVES 

ard  of  costs  of  operations  of  labor  and  expense. 
It  must,  beginning  at  general  or  specific  totals,  be 
prepared  to  run  back  over  the  ground  and  show 
fact  and  reason,  in  slightest  detail,  of  differences 
observed  by  comparison,  or  of  operations  desired 
for  whatsoever  reason.  It  must  follow  production 
and  illustrate  its  variations  and  the  results  to  the 
welfare  of  the  business.  To  it  material  is  but  base 
cost  and  waste;  labor  is  but  an  instrument  of  pro- 
duction whose  reward  is  constantly  to  be  gauged  by 
its  effect  on  the  unit  cost  of  production;  expense 
is  an  element  whose  value  is  to  be  determined  by 
its  effect  on,  and  increasing  or  decreasing  relation 
to,  the  article  cost.  The  cost  system,  in  fact,  should 
become  the  moving-picture  film  of  the  business  in 
its  constant  internal  mutations.  When  it  has  be- 
come so,  then  it  will  be  found  offering,  urging, 
and  indeed  forcing,  methods  of  improvement  and 
control. 

In  the  modern  struggle  for  improvement,  scien- 
tific study  of  management  methods,  and  lower  cost 
(or  rather,  as  the  race  now  runs,  of  the  prevention 
of  too  great  cost-increase),  the  practical  cost  sys- 
tem must  be  the  foundation  stone.  In  the  mind 
of  every  sensibly  ambitious  and  up-to-date  execu- 
tive, looking  for  methods  which  will  render  to  his 
employees  and  his  stockholders  as  well  as  to  the 
public  the  best  service,  the  cost  system  must  strike 
the  keynote,  for  it  will  prove  not  only  a  constant 


THE    BASIC    IMPROVEMENT  141 

prodder  as  to  the  necessity  of  change  and  improve- 
ment, but  it  will  point  the  weak  spots,  and  it  will 
differentiate  the  values  of  different  methods. 

The  executive  desiring  to  keep  up  to  date,  to 
install  in  his  plant  better  methods  of  organization, 
of  wage  payment,  of  work  routing,  of  production 
increase,  of  waste  saving,  of  sales  increase — in  fact, 
of  general  or  specific  improvement,  or  to  maintain 
what  he  has,  will  do  best  to  make  sure  first  that  he 
has  a  right  and  practical  cost  system,  for  cost  sys- 
tem is  the  basic  improvement.  Figures  form  the 
body  of  costs,  but  the  right  and  practical  cost  sys- 
tem has  a  soul  that  keeps  demanding  right  shop 
methods. 

This  division  between  the  accounting  and  the 
cost  system,  the  one  showing  the  external  and  the 
other  the  internal  affairs  of  the  manufacturing 
plant,  has  never  been  well  understood  or  acknowl- 
edged, although  practiced  in  many  plants,  because 
the  cost  system  has  not  been  developed  as  ably  and 
exactly  as  has  accounting;  because  both  use  figures 
as  an  instrument,  it  has  not  been  appreciated  that 
a  practical  cost  system  is  more  a  presentation  of 
ideas  than  accounting.  And  this  failure  has  brought 
about  a  definite  weakness  in  the  cost  system.  The 
good  accounting  system  has  an  extreme  similarity 
in  all  businesses,  but  while  the  principles  are  the 
same,  the  proper  practice  of  the  cost  system  varies 
materially  in  different  plants,  according  to  condi- 


142  COST    REPORTS    FOR    EXECUTIVES 

tions,  nature  of  organization,  circumstances,  and 
kind  of  manufacture. 

In  general,  then,  the  cost  system,  for  best  value, 
demands,  both  in  introduction  and  in  practice,  a 
somewhat  different  experience  and  different  tem- 
perament than  does  accounting. 

It  needs  likewise  what  it  has  not  obtained  in  very 
many  plants — an  understanding  by  the  executive 
of  its  principles,  its  practice  and  its  possibilities. 
The  practical  man  is  too  liable  to  look  upon  fig- 
ures of  cost  with  contempt  when  they  do  not  show 
the  results  his  judgment  anticipated.  Yet  one  of 
the  first  valuable  effects  of  a  cost  system  is  to  show 
the  fallibility  of  the  judgment  of  the  practical  man 
when  he  deals  with  costs.  It  would  be  a  happier 
future  for  many  plants  if  the  superintendents  were 
promoted  to  the  cost  department,  or  if  their  young 
men  in  training  for  future  executive  duties  should 
take  a  course  in  this  department. 

But  one  thing  ought  to  be  clearly  understood, 
viz.,  that  despite  the  constant  talk  of  systems  of  all 
kinds,  and  their  value,  no  business  is  made  a  suc- 
cess by  them  alone.  Business  success  is  made  by 
policies,  energy,  enthusiasm,  work,  and  sagacity. 
In  a  struggle  of  brains  versus  system,  brains  will 
usually  win.  System,  and  especially  cost  system, 
is  merely  a  tool  with  which  brains  enhances  its  ef- 
fectiveness by  using  it  as  a  basis  of  knowledge  to 
start  with  and  as  a  check  and  framework  to  hold 


THE    BASIC    IMPROVEMENT  143 

the  whole  together  like  the  wax  in  a  honey-comb, 
and  it  assumes  importance  only  as  intelligence,  per- 
sistence, and  energy  wield  it. 

It  has  frequently  happened  that  the  tool  has  been 
built  too  large  to  wield,  but  it  has  also  too  often 
happened  that  even  when  properly  built  it  has  been 
put  into  the  hands  of  an  operative  too  weak  to 
handle  it.  When,  and  where,  the  complete  value 
of  a  cost  system  is  understood,  it  will  be  found  re- 
munerative by  the  executive  to  put  it  in  charge  of 
a  man  who  is  well  paid  not  only  because  he  is  ex- 
pert with  figures,  but  because  he  is  practical,  pa- 
tient, a  thorough  investigator,  analytical  of  mind, 
logical  in  his  conclusions,  and  resourceful,  just  as 
the  accountant  is  well  paid  when  he  possesses,  in 
addition  to  his  expertness,  a  watchfulness  of  exter- 
nal financial  relations,  and  a  trustworthiness.  And 
such  a  cost  man  should  have  time  not  only  to  make 
the  figures  but  to  investigate  and  interpret  them. 

Now  as  to  the  weakness  that  has  been  developed 
in  cost-system  practice  through  the  failure  of  the 
executive  to  busy  himself  with  its  understanding, 
and  the  failure  to  distinguish  between  accounting 
and  cost  system  and  the  necessities  of  their  varying 
practice,  this  has  taken  place  at  two  points — its 
introduction  and  its  practice. 

In  the  introduction  of  cost  system,  accountants 
have  taken  the  lead  because  of  their  expertness 
with  figures,  and  not  unnaturally f  but  they  have 


144    COST  REPORTS  FOR  EXECUTIVES 

too  often  failed  either  to  have,  or  to  get,  the  prac- 
tical man's  viewpoint  in  their  structure,  or,  with 
an  understanding  of  human  nature,  to  create  inter- 
nally that  enthusiasm  and  appreciation  which  alone 
can  bring  best  results.  Accountants  have  too  fre- 
quently mistaken  the  form  for  the  substance,  for 
the  strong  tendency  of  accounting  is  towards  form, 
and  the  strong  necessity  of  a  cost  system  is  sub- 
stance. The  result  has  been  in  many  plants  a  cum- 
bersome and  inefficient,  even  if  not  entirely  inef- 
fective, system.  This  is  not  to  belittle  accountants, 
who  have  an  ample  and  sufficient  usefulness,  and 
many  of  whom  have  also  the  requisite  abilities  for 
any  work  they  may  undertake.  But  this  practice 
has  led  many  impractical  men  into  the  industrial- 
engineering  field. 

Again,  in  the  practice,  the  weakness  developed 
has  come  about  through  the  intrusting  of  the  cost 
system  into  the  hands  of  men  with  purely  clerical 
ability,  because  of  the  failure  of  the  executive  to 
appreciate  the  values  to  be  obtained  from  the  em- 
ployment of  the  more  highly  trained  practical  man. 

Time  must  of  course  correct  these  weaknesses, 
but  it  can  do  so  only  through  the  education  of  the 
executive  as  to  the  values  hidden  in  the  right  and 
practical  cost  system,  and  this  must  come  through 
the  training  of  the  younger  generation. 

It  may  not  be  considered  amiss  to  repeat  here 
that  the  best  way  to  build  a  cost  system  is  from 


THE    BASIC    IMPROVEMENT  145 

the  totals  down  to  the  details,  and  not  from  the  de- 
tails up  to  the  totals.  The  former  is  the  logical 
way  for  many  reasons.  It  is  easier  to  obtain  the 
totals  and  to  prove  them  correct,  thus  obtaining  a 
sure  foundation  to  build  upon.  It  is  a  difficult  and 
discouraging  task  to  gather  a  great  mass  of  de- 
tails and  prove  them  with  totals,  and  where  this 
has  been  undertaken  it  has  usually  resulted  in  the 
rendering  of  presumed,  but  unproven,  costs  of  ar- 
ticles without  those  values  of  cost  control  which  are 
essential  to  a  good  system.  But  if  the  system 
starts  with  the  totals  of  the  three  general  elements 
— material,  labor,  and  expense — as  proven  with  the 
accounting;  divides  these  into  sub-totals,  and  these 
into  still  other  subdivisions,  as  circumstances  and 
conditions  of  organization,  of  departments  and  di- 
visions thereof,  and  of  articles  of  manufacture  de- 
mand, then  the  proceeding  follows  from  proof  to 
proof,  and  from  significant  total  to  detailed  an- 
alysis as  is  desired. 

Such  a  scheme  is  of  course  naturally  dependent 
upon  the  aim  in  view  for  the  cast  of  its  final  analy- 
sis, for  it  should  plainly  be  understood  that  with 
the  mass  of  petty  operations  and  changing  situa- 
tions which  make  up  the  total  of  production,  a 
definite  schedule  of  desired  enlightenment  must  be 
made  if  the  cost  system  is  not  to  produce  a  mass 
of  useless  figures,  or  fall  short  of  a  full  illustration 
of  the  whole  situation.    This  is  to  say  that  the  cost 


146    COST  REPORTS  FOR  EXECUTIVES 

system  should  be  planned  in  advance  as  to  what  it 
is  to  accomplish. 

Two  elements  are  very  essential  in  the  building 
of  a  cost  system — persistence  and  time.  It  takes, 
in  a  plant  of  any  size,  from  one  to  two  years'  time 
to  build  a  good  system,  because  so  much  human 
nature  is  involved,  from  the  executive  down,  and 
persistence  follows  as  an  essential  to  these  condi- 
tions. The  firm  support  of  the  executive  against 
all  difficulties,  physical  and  human,  must  be  given. 

A  cost  system  is  an  encourager  of  high  wages. 
There  is,  in  many  plants,  an  opposition  to  high 
wages  due  to  the  belief  that  increasing  wages  nec- 
essarily mean  increasing  cost.  Of  course,  under 
certain  conditions,  as  in  a  horizontal  wage  increase, 
this  is  so,  but  a  study  of  the  detailed  wage  situation 
through  the  cost  system  will  almost  invariably 
show,  under  right  manufacturing  conditions,  that 
the  earners  of  the  highest  wages  are  the  producers 
of  the  lowest  unit-cost. 

The  proper  cost  system  is  a  selecter  and  former 
of  good  organization,  for  it  shows  plainly  the  well 
operated  and  improving  departments  and  those 
badly  run,  and  forces  necessary  changes,  or  creates 
through  its  normal  effect  a  more  determined,  re- 
sourceful, and  careful  management;  for  cost  is  the 
basic  improvement.  But  it  does  not  stop  at  the 
executive  organization.  Its  proper  use  gauges  the 
value  and  efficiency  of  every  operative,  every  ma- 


THE    BASIC    IMPROVEMENT  147 

chine,  every  method,  and  every  operation.  With 
the  proper  standards  it  thus  becomes  a  valuable 
instrument,  but  it  must  be  realized  by  the  executive 
that  in  its  ordinary  use  it  is  not  a  barometer  but 
only  a  thermometer.  It  merely  states  the  past 
occurrence  and  renders  only  the  values  which  en- 
thusiasm, resource,  and  intelligence  draw  from  it. 
But  with  the  proper  use  it  can  become  not  merely 
historical  but  prophetic,  because  once  the  cost  sys- 
tem has  established  a  clear  backward  trail  of  events, 
and  reasonable  methods  of  control  of  shop  opera- 
tions have  been  introduced,  it  is  no  difficult  feat  to 
prognosticate  future  results  with  it,  either  as  to  the 
article  costs  or  as  to  sectional  or  total  net  results. 
And  when  this  can  be  done  the  cost  system  is  es- 
tablished. 

A  well  operated  cost  system  is  a  species  of  in- 
surance. It  insures  against  continuance  of  un- 
profitable policies,  the  taking  of  unprofitable  or- 
ders. It  is  also  a  good  credit  maker.  There  is 
in  mind  the  case  of  a  manufacturer  who  during  the 
recent  panic,  upon  being  refused  a  loan,  took  his 
cost  system  to  the  bank,  and  had  no  difficulty  in 
persuading  the  banker  that  his  business  was  con- 
ducted properly  on  a  basis  of  knowledge. 

In  conclusion  then,  the  logic,  the  common  sense, 
and  the  business  sense  of  the  manufacturing  situ- 
ation are  inevitable.  Every  manufacturing  plant 
demands  a  cost  system  presenting  regularly  the 


148    COST  REPORTS  FOR  EXECUTIVES 

facts  of  the  situation.  But  just  as  a  painting  of 
the  veriest  amateur  may  be  labeled  "A  Landscape," 
where  some  of  the  bare  facts  of  nature  stand  cold 
and  warped,  while  a  Corot  similarly  named  per- 
mits the  imagination  to  dwell  and  appreciate  the 
true  facts  and  beauties,  so  the  term  "Cost  System" 
is  used  to  cover  that  situation  where  disconnected 
and  unproved  figures  are  used  to  determine  poli- 
cies, where  masses  of  figures  unintelligent  in  their 
communications  are  collected,  and  every  gradation 
up  to  that  situation  where  the  cost  system  with 
the  minimum  work  illustrates  clearly  the  changing 
conditions  as  a  solid  basis  for  action. 

It  is  plain,  then,  that  the  executive  needs  a  stand- 
ard by  which  to  gauge  his  cost  system.  But  the 
standard  is  evident.  It  must  present  to  him,  in  a 
proven  way,  the  fair,  complete  costs  of  his  units  of 
production;  it  must  tell  the  story  of  the  use  and 
waste  of  his  materials;  it  must  illustrate  in  opera- 
tion and  in  groups  the  productivity  of  his  labor ;  it 
must  picture  the  values  and  returns,  in  units  and 
by  divisions,  of  his  expenses  and  their  relations  to 
labor  operations  and  sales;  it  must  marshal  facts 
illustrative  of  the  movements  and  relations  of  pro- 
ductions and  sales,  and  of  the  changing  situation 
as  may  be  desired,  or  of  the  comparative  values 
of  methods;  and  it  must  do  these  things  with  the 
minimum  of  time  and  exertion  on  the  part  of  the 
executive;  for  too  much  cost  system,  too  many  fig- 


THE    BASIC    IMPROVEMENT  149 

ures,  defeat  the  real  purpose  of  cost,  clogging  ac- 
tion. 

When  it  does  these  things  with  a  fair  readiness 
so  that  the  business  intelligence  of  the  executive 
can  grasp  the  truth  (for  let  it  not  be  forgotten 
that  with  all  its  possibilities  the  cost  system  is 
merely  an  inanimate  record) — when  it  does  these 
things,  then,  the  executive  has  introduced  into  his 
business  a  moving-picture  show  of  his  manufactur- 
ing (more  comprehensive  than  photography,  which 
has  its  uses  in  this  connection),  comprehending  a 
vision  of  the  whole  as  well  as  every  part,  and  which 
can  be  run  over  again  and  again  as  he  desires,  and 
in  comparisons. 

When  he  has  accomplished  this  introduction,  the 
executive  will  have  that  which,  with  the  aid  of  the 
philosophy  of  costs,  will  be  a  constant  refining  in- 
fluence in  his  plant,  will  check,  spur,  and  encour- 
age his  organization,  will  urge  constantly,  by  show- 
ing value,  improved  methods.  And  his  business 
will  then  be  in  possession  of  a  right  cost  system — 
the  basic  improvement. 


THE   END 


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